S h i b le e N o ma n

Assistant Professor
Dept. of Japanese Studies
University of Dhaka
• In the late 1980’s, on the heels of a three-decade
long “Economic Miracle”, Japan experienced its
infamous “Bubble economy”.
• In which stock and real estate prices soared to
stratospheric heights driven by a speculative
mania.
• Japan’s Nikkei stock average hit an all-time high
in 1989, only to crash in a spectacular fashion
shortly after, causing their real estate bubble to
collapse and throwing the country into a severe
financial crisis and long period of economic
stagnation known as the “Lost Decades.”

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 1. Monetary Policy and Financial
Deregulation:
Easy Credit: The Bank of Japan (BOJ) pursued
an expansionary monetary policy, lowering
interest rates and flooding the financial system
with liquidity. This created a conducive
environment for borrowing and speculative
investments.
Financial Deregulation: Deregulation
measures in the 1980s loosened restrictions on
lending and investment activities of financial
institutions. This led to increased risk-taking
behavior as banks engaged in speculative
lending and investments.
2. Asset Price Inflation:
Real Estate Boom: One of the hallmarks of the
Japanese bubble was the unprecedented rise in real
estate prices, particularly in urban areas like
Tokyo. Speculative buying fueled by expectations
of continued price appreciation led to a bubble in
the real estate market.
Stock Market Speculation: Concurrently, the
Japanese stock market experienced a surge in
prices, driven by speculative trading and
investment. The Nikkei stock index reached
dizzying heights, far exceeding fundamental
valuations.
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 3. Corporate Behavior:

Excessive Investments: Japanese corporations, 4. Speculative Psychology:

buoyed by inflated stock prices and easy access
to credit, embarked on ambitious investment
Herd Mentality:
projects and expansionary strategies. Many
A pervasive belief in the invincibility of the
companies engaged in speculative ventures and
Japanese economic model and the infallibility of
acquisitions, often financed through debt.
Japanese corporations fueled a speculative frenzy.
Investors and businesses alike succumbed to
Cross-Shareholdings: Japanese corporations
irrational exuberance, leading to overvaluation of
maintained extensive cross-shareholdings with
assets and excessive risk-taking.
other companies, which were often overvalued
during the bubble period. This
interconnectedness amplified the risks when the
bubble burst.

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5. Government Policies and Structural Factors:

Tax Policies: Tax incentives for real estate investment encouraged speculative buying and contributed to the real
estate bubble. The tax code favored investment in land and property, leading to distortions in the allocation of capital.
Regulatory Environment: Weak regulatory oversight allowed financial institutions to engage in risky lending practices
and speculative investments without adequate safeguards. The lack of transparency and accountability exacerbated the
buildup of systemic risk.

Plaza Accord: The Plaza Accord of 1985, aimed at depreciating the US dollar, inadvertently contributed to the bubble
by making Japanese exports more expensive. This led to increased domestic investment as Japanese investors sought
higher returns domestically.

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 The Lost
Decade
Similarly to the USA in the second half of the 20th century, Japan’s economy was
experiencing growth that culminated in the 1980s. The decade in question is
sometimes called the ''Decade of Greed'' as earnings and spending's were very
high. Until the mid-2000s, everything seemed to go well, but as nothing lasts
forever, a crisis began in 2008.
A significant decline happened in Japan a bit earlier, in the 1990s. This recession Source: W hat Caused The Lost
Decade In Japan? - W orldAtlas
period lasted from 1991 to 2002, and the period is now commonly known as the
Lost Decade.
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 The main reason can be found
in a significant fall in the
financial markets.
In the economic bubble of the
80s, banks were loaning more
and more money and did not
pay close attention to the client’s
capability to pay them back.
This was then followed by the
fall of the real economy which
caused a severe economic crisis.
Why Did The
Lost Decade
Ultimately, this state of affairs Happen?
could not keep up, and the
economic system collapsed.
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 When the Bank of Japan raised the inter-banking lending rate to
stabilize the market filled with bad loans, the unrealistic
economic situation began bursting.
 As property and stock prices both fell, assets of companies and
banks were now worth less than their liabilities.
 Low to no equity and decreasing value of assets meant that
financial institutions such as banks and insurance companies
were in debt, including major national banks.
 The economy crashed, and financial institutions were facing
serious losses. Because the real estate prices plummeted, stock
prices were falling rapidly, and bad loans became a burden on
the whole system.

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Figure 1:Changes in the
savings-investment
balance in Japan

Source: The National Accounts of the Cabinet Office, Japan

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 The government bailed the
banks out, but even with
their help, they continued to
work under debt. Many
comp an ies were in trouble as
well, but could no longer
obtain credit. People were
losing their jobs and could
not afford to spend money or
pay their debts.

 Japan was struggling . The

property values were
spiraling, interest rates were
going down, and
unemp lo ym en t was rising. A
lot of people who were
emp lo yed worked part -tim e
because comp an ies were
cutting costs wherever they
could. GDP was declining or
stagnating .

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Today, Japan is still fighting deflation, low-interest rates, and weak banks. Even though the
effect of the lost decade has lessened, there are new challenges ahead as there are still many
people working part -time jobs that lack stability. This, combined with a rise in the older
population that is common in many developed countries, makes tackling modern negative
economic trends shortly after a problematic period such a difficult task.

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Any Question?

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