Bursting of the Bubble Economy in Japan

is due in part to the fact that as wages started to sink and loans stopped flowing, too many goods and not enough buyers resulted in deflation. Consumer goods became increasingly cheaper by the month, discouraging consumption. After all, why buy a refrigerator this month if it will likely be $30 cheaper next month?

As companies tried to sell off excess assets and gradually pay back their groaning debts, prices and then wages started to sink. Banks stopped authorizing loans to new borrowers as they tried to recoup old losses. Japan soon entered a nuclear winter of deflation, with too many goods for sale and not enough buyers. In such a desolate, upside-down economy, consumer prices began to fall by 1 percent each year, which, perversely, made the savings left in bank accounts ever more valuable even though they earned only the minutest rates of interest. Like an acid eating away at self-confidence, deflation also worked to discourage consumption: Why buy a refrigerator this month if it will likely be $30 cheaper next month?

is due in part to the fact that in 1998—after two securities firms and the largest bank on the northern island of Hokkaido ignobly collapsed—the government was forced to dip into the national treasury and put $18 billion of taxpayer funds into the nation's largest banks to prevent them from failing, too.

By 1998—after two securities firms and the largest bank on the northern island of Hokkaido ignobly collapsed—the government was forced to dip into the national treasury and put $18 billion of taxpayer funds into the nation's largest banks to prevent them from failing, too. It also created a new Financial Supervisory Agency to oversee a gentle, Japanese-style cleanup. In a culture where corporate responsibility remained diffuse, the government did not force top bank managers to quit, and quietly indicated that it would pursue a policy of forbearance rather than inject the upward of $700 billion it would take to make sick banks healthy again.

is due in part to the fact that Japan was ready neither to resuscitate troubled lenders or seize the assets of deadbeat borrowers, so they made the poor decision of pumping massive quantities of money into the system to keep dodgy borrowers afloat.

The decision to delay and defer reflected the equally unappealing alternatives the politicians faced. Voters would be outraged if even more of their taxes were set aside to resuscitate troubled lenders. Yet forcing tattered banks to seize the assets of their deadbeat borrowers would put many more mom-and-pop factories out of business forever and trigger a startling jump in unemployment. Unwilling to endure the political fallout from either course, the government authorized loan guarantees to keep banks in business, maintained deposit insurance on individual savings accounts to mollify taxpayers, and drastically sliced interest rates, pumping massive quantities of money into the system to keep dodgy borrowers afloat.

is due in part to the fact that so many corporations and banks owned a stake in one another, resulting in the banks keeping dying companies on life support, hoping that if they just held on a bit longer, the economy might somehow return to growth on its own.

Since so many corporations and banks owned a stake in one another, no one pushed for a day of reckoning. Instead, Japan Inc. preferred to keep its dying companies on life support, hoping that if they just held on a bit longer, the economy might somehow return to growth on its own, or that a miraculous rise in land prices might someday restore balance sheets.

is due in part to the fact that the incestuous ties of Japan's banks to their corporate borrowers allowed them to flout market discipline and continue to roll over unpaid loans.

Japan's banks could also flout market discipline thanks to their incestuous ties to their corporate borrowers. Banks and insurance companies kept rolling over unpaid loans rather than acknowledge that traditional clients had now become insolvent, and kept paying dividends long after they began hemorrhaging red ink. Shutting down scores of bad borrowers and throwing millions of people out of work would violate the nation's sacred social contract, and cause bankers to lose credibility. Calling deadbeat borrowers on the carpet, or reducing the dividends they paid to shareholders might call attention to management's own decision-making and raise the issue of its accountability. This leniency, however, only dragged the banks—already hobbled by the collapse of land prices—down farther.

is due in part to the government having hollowed out the economy by protecting feeble domestic firms, which drove up prices for Japanese companies, forcing them to send factory work abroad, which further enfeebled companies.

By protecting small and beaten-down domestic firms, the government helped guarantee that workers still were paid. But the support artificially boosted prices for land, labor, and materials so high that, to compete effectively around the world, the best firms, like Honda and Panasonic, had to send more and more of their factories to Malaysia, China, and Mexico. As this “hollowing out” accelerated, fewer efficient firms were left to subsidize the growing army of the feeble. A market more open to foreign competitors and foreign investment would have imposed more discipline and forced unprofitable firms to sink if they couldn't refloat themselves.

is due in part to the Ministry of Finance having been reluctant to pull the trigger as bad debts continued to swell.

The Ministry of Finance was also reluctant to pull the trigger as bad debts continued to swell. But such mercy exacted its own costs, too. As all-but-defunct corporations kept producing, their existence continued to distort the market by keeping wages higher and prices lower than they might otherwise become.

is responsible for a loss of Japan’s own narrative, of confidence. self-confidence, socially and economically.

“We lost our own narrative,” Haruki Murakami, one of Japan's most prominent contemporary novelists told me one day, when I asked him to explain the meaning he drew from his nation's lost decade. When the bubble collapsed, “what we lost was confidence. Confidence in ourselves—socially and economically.”

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bursting of the bubble economy in japan