1.

The Economic Bubble and Its Aftermath

In the latter half of the 1980s Japan experienced a period of financial euphoria that came to be
known as the bubble. The bubble was triggered in 1985 by a sudden rise in the value of the yen.
As Japanese goods became more expensive overseas, Japan’s exports decreased and its economy
slowed. To stimulate economic growth, the LDP government increased public spending and
eased interest rates. Real estate and stock prices soared, and even middle-class Japanese began to
speculate. In addition, the high value of the yen encouraged Japanese investment overseas. In
Southeast Asia, where labor costs were lower, Japanese companies built new production
facilities. In the United States they invested not only in electronics factories and automobile
assembly plants but also bought highly visible assets such as Rockefeller Center in New York
City. In early 1990, however, the economic bubble burst suddenly when the government raised
interest rates to dampen speculation.

The collapse of the bubble ushered in a period of prolonged economic slowdown. Large

corporations attempted to deal with the slowdown through downsizing, but many large banks and
financial institutions remained saddled with huge amounts of bad loans left over from the
economic boom period. In 1997 an economic downturn in Southeast Asia harmed Japanese trade
and investment in the region and further undermined the strength of Japan’s economy. Public
confidence in the economy steadily deteriorated as the economic bureaucracy appeared unable to
deal with the country’s economic problems. By the early 2000s Japan remained mired in its
longest recession since World War II.

Blame for the continuing economic slowdown was laid at the door of the MOF, which did little
despite strong domestic and foreign demands for economic deregulation and greater market
freedom. In May 1997 the MOF announced plans for a “Big Bang” to deregulate banking and
finance, but daily newspaper and television news continued to headline stories about
bureaucratic inflexibility, incompetence, and corruption. In 1998 the Diet passed a series of bills
intended to initiate economic recovery by increasing government spending and authorizing
measures to address the banking problem. By late 2002, however, a decade of massive stimulus
packages and emergency measures had failed to stimulate Japan’s stagnant economy. Signs of an
economic turnaround began to appear late in 2005

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