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11. Japan’s Bubble Economy and Asia’s Economic Recovery
- ISEAS–Yusof Ishak Institute
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256 Japan and China CHAPTER 11 Japan’s Bubble Economy and Asia’s Economic Recovery Introduction The collapse of the so-called bubble economy in March 1991 in Japan and the long entrenchment of Japan’s economy in the doldrums of recession and financial despair can be considered one of the important factors contributing to the Asian financial crisis that erupted in July 1997. Similarly, it is one of the main reasons why the recovery from the crisis is still on an uncertain footing. This chapter examines the background and causes of the bubble economy, focusing on stock and real estate market issues. Next, it delves into the various government policies (such as monetary and fiscal policies, banking and foreign exchange rate systems and crisis management measures) implemented, their impact and limitations as to re-energizing the economy, discussing them in detail and putting forward criticisms and suggestions. Lastly, it considers the complementary relationship between Japan and Asia and analyzes in some detail Japan’s role in the recent financial crisis. This chapter is particularly aimed at examining the potential effects of the so-called New Miyazawa Plan on the nascent economic recovery of Asia. Despite their high degree of interdependence the Asian countries have few and weak formal organizations that can help them coordinate their economic policies. Setting up a new international organization or institution among the Asian countries to strengthen economic cooperation in the region is an important focal point in the future. 11 Japan&China Ch 11 11/6/07, 12:26 PM 256 257 Japan’s Bubble Economy and Asia’s Economic Recovery 257 The Background and Causes of Japan’s Bubble Economy The Western nations, led by the USA, put pressure on Japan to let the yen appreciate in the mid 1980s. This happened at the G5 meeting held in September 1985 (“the Plaza Accord”). Since then the Japanese currency appreciated rapidly from 242 yen to the US dollar just before the G5 meeting, to 100 yen in June 1994, and later to 80 yen in May 1995. As a result, asset values in Japan, in dollar terms, tripled within a decade. The reason behind the move was that the USA suffered from serious “twin deficits” (fiscal and international trade), and wanted to restrict imports from Asia, Japan in particular. Meanwhile in Japan, asset (stocks and land property) values increased substantially but abnormally from the second half of the 1980s to the end of 1990. It was even referred to as “asset price inflation” or “stock inflation”. The situation was characterized by strong increases in asset prices, while prices of commodities and services in general remained stable. The Nikkei Index jumped threefold from approximately 13,000 in January 1986, to approximately 39,000 by the end of 1989. Land prices also tripled during the same period. Table 11.1 indicates that total land prices in Tokyo alone increased from 176 trillion yen in 1985, to 517 trillion yen in 1990. Market capitalization (total equity of listed companies on the Tokyo Stock Exchange) increased from 160 trillion yen to 478 trillion.1 Obviously this did not reflect the economic reality in Japan. If we take a closer look at the GDP in Japan, it increased only from 324 trillion yen to 434 trillion yen during the same period. Table 11.1 further shows that both land prices (in Tokyo) and market capitalization (as described above) exceeded Japan’s GDP during the 1987–1991 period and the 1988–1990 period respectively. Hence Japan created a “bubble economy” during the period between the second half of the 1980s and the end of the year 1990. What made the bubble economy possible? The large scale financial deregulation policy implemented since the second half of the 1980s was a major reason. Following the drastic yen appreciation in September 11 Japan&China Ch 11 11/6/07, 12:26 PM 257 [54.242.191.214] Project MUSE (2024-03-29 14:43 GMT) 258 Japan and China Table 11.1 GDP, Stock and Real Estate Values (Unit: Trillion yen) Year GDP Stock Real estate 1985 324 169 176 1986 338 230 280 1987 354 301 449 1988 377 394 529 1989 403 527 521 1990 434 478 517 1991 457 373 504 1992 484 297 428 Notes: * Stock value represents the total value of partially listed companies by Tokyo Stock Exchange. ** Real estate value represents the total amount of residential assets in Tokyo yen during this period. Source: Noguchi Yukio, Baburu No Keizaigaku (Bubble Economics...