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    Japanese Bubble Burst: Akhilesh Jatin Mudit Anil Aravind

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    The Japanese economy experienced a bubble in the 1980s that burst in the early 1990s, resulting in over a decade of economic struggles known as the "Lost Decade." Stock and land prices ballooned to unprecedented levels due to loose monetary policy, deregulation of banks, and a strengthening yen. When the bubble popped in the early 1990s, asset prices crashed and Japan's banks and economy suffered greatly due to bad loans and debt. The Japanese government attempted monetary easing and fiscal stimulus to address the crisis, but growth remained weak for many years.

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    Japanese Bubble Burst: Akhilesh Jatin Mudit Anil Aravind

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    Jatin Rastogi
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    The Japanese economy experienced a bubble in the 1980s that burst in the early 1990s, resulting in over a decade of economic struggles known as the "Lost Decade." Stock and land prices ballooned to unprecedented levels due to loose monetary policy, deregulation of banks, and a strengthening yen. When the bubble popped in the early 1990s, asset prices crashed and Japan's banks and economy suffered greatly due to bad loans and debt. The Japanese government attempted monetary easing and fiscal stimulus to address the crisis, but growth remained weak for many years.

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    The Japanese economy experienced a bubble in the 1980s that burst in the early 1990s, resulting in over a decade of economic struggles known as the "Lost Decade." Stock and land prices ballooned to unprecedented levels due to loose monetary policy, deregulation of banks, and a strengthening yen. When the bubble popped in the early 1990s, asset prices crashed and Japan's banks and economy suffered greatly due to bad loans and debt. The Japanese government attempted monetary easing and fiscal stimulus to address the crisis, but growth remained weak for many years.

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    18 views11 pages

    Japanese Bubble Burst: Akhilesh Jatin Mudit Anil Aravind

    Uploaded by

    Jatin Rastogi
    The Japanese economy experienced a bubble in the 1980s that burst in the early 1990s, resulting in over a decade of economic struggles known as the "Lost Decade." Stock and land prices ballooned to unprecedented levels due to loose monetary policy, deregulation of banks, and a strengthening yen. When the bubble popped in the early 1990s, asset prices crashed and Japan's banks and economy suffered greatly due to bad loans and debt. The Japanese government attempted monetary easing and fiscal stimulus to address the crisis, but growth remained weak for many years.

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    JAPANESE BUBBLE BURST

    Akhilesh Jatin Mudit Anil Aravind

    Japanese Bubble Burst

    Japanese Bubble: It refers to the growth in Japanese economy, started in late 1950s but start bubbling (booming) in early 1980s and swelling in 1986. Bubble Burst: It refers to the burst of bubble economy or collapsing of Japanese economy in early 1990. It last for a decade (10 yrs.) and thus 1990 2000, also known as Lost Decade for Japan.

    Bubble Economy
    In 1980: The Japanese stock price index and land price began to rise in the early 1980s
    and peaked in 1991. Stocks price raised to more than five times and land price more than double the 1980 level.

    In 1985: U.S. Secretary (Treasury) with finance ministers of Japan and other 3
    countries depreciated $ against Yen, to boost U.S exports. It doubled the purchasing power of the yen. In 1986: Japan's had huge trade surplus and share of world exports was at its peak. Also, Yen had become so strong that Japanese businessmen were buying up properties all over the world. Late 1989: Nikkei index reached a historic high of 38,915.87, and Japan was on the verge of surpassing the U.S. economy. Collateral: Profits were used as collateral for loans on real estate. The real estate (as collateral) to buy shares on the Tokyo Stock Exchange and stocks (as collateral) on yet more borrowing.

    Stock & Land Prices

    Consequences
    Tokyo banks became the world's biggest and most powerful. In the bubble economy businessmen boasted of spending $30,000 in one night out and $300,000 in one week of partying. People flew from Tokyo to Sapporo just to enjoy a bowl of noodles. At the height of the bubble economy all the property in Japan, which is smaller than California, was worth five times that of the United States. In October 1988 the Japanese National Land Agency estimated its value at $248,000 per square foot. Those who had land became very rich and those who didn't had little chance of buying their home. This increased the sense of inequality and social injustice.

    Reasons for Bubble economy


    1. Bank deregulation: Japanese banks lacked the ability to correctly evaluate land and property investment projects and check the credibility of SME borrowers. Hence they (banks) over-lent. Availability of cheap capital: In 1985 there was a sharp yen appreciation, and the Bank of Japan lowered short-term interest rates and eased money in response. Surge in exports: Of automobiles and electronics. Yen appreciation: Japanese companies built factories at a rapid pace, bought up companies and properties and invested in all kinds of development projects.

    2.

    3. 4.

    Factors Responsible For Bursting of Bubble


    Excessive Investment in Real Estate. Raising of money through banks at higher ROI. Majority of Population was above 45. Continuous Appreciation of Yen.

    Major Earthquake in 1995.


    Failing of Financial Institutions.

    Monetary policy responses to the bubble


    Bank of Japan raised the official discount rate sharply from May 1989 until August 1990 to preemptively prevent inflation. Bank of Japan did not mention to land prices as a reason for policy changes. Nonetheless, after Yasushi Mieno became Governor in December 1989, general public seemed to think that Governor Mieno intended to crash the bubble. Stock prices turned to decline at the beginning of 1990, while land prices continued to increase until the end of 1990.

    Monetary easing
    Call rate
    8 7 6 5 4 3 2 1 0

    Rate of Change in Consumer Price Index


    30
    20 10 0 -10 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
    %

    1985

    1986

    1987

    1988

    1989

    1990

    1991

    1992

    1993

    1994

    1995

    1996

    1997

    1998

    1999

    2000

    2001

    2002

    2003

    2004

    2005

    2006

    2007

    2008

    2009

    2010

    Bank of Japan lowered the official discount rate on July 1, 1991, and continued to lower it or the call rate (i.e., overnight interbank rate) until the call rate became zero in February 1999. Despite the monetary easing, the land price continued to fall and the consumer price index also fell in 1995, 1999 and afterwards. One reason for the weak effects of monetary easing on asset and goods prices is the banks balance sheets deteriorated by nonperforming loans.

    2011

    Fiscal Stimulus
    Public investment / GDP 10.00 8.00 6.00
    %

    Government debt/GDP
    2.5 2 1.5 1 0.5 0
    1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

    4.00 2.00 0.00

    1980

    1982

    1984

    1986

    1988

    1990

    1992

    1994

    1996

    1998

    2000

    2002

    2004

    2006

    2008

    Fiscal year

    The government released a series of economic policy packages from March 1992 to September 1995, increasing expenditures on public works by issuing government bonds. The effect of fiscal stimulus on GDP was limited, partly due to the leakage to imports. Increases in public works, as well as increases in social security benefits and decreases in tax revenues, resulted in the accumulation of government debt throughout the 1990s.

    2010

    What lessons should we learn?


    Greed is universal. Hindsight is 20/20. The market cant solve everything. The government cant solve everything. Quick fixes probably wont fix it. Watch out for the social fallout of economic distress.

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