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The collapse of Japan's bubble economy and its consequences

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The collapse of Japan's bubble economy and its consequences

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The Collapse of Japan’s Bubble Economy
And its Consequences
Copyright 2000
By:
Peter Lee Okada
A Thesis Presented to the
FACULTY OF THE GRADUATE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfillment of the
Requirements for the Degree
MASTER OF ARTS
(EAST ASIAN AREA STUDIES)
May 2000
Peter Lee Okada
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UMI Number: 1405219
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UNIVERSITY OR SOUTHERN CALIFORNIA
THE GRADUATE S C H O O L
UNIVERSITY PARK
LAS ANGELES. CALIFORNIA 10007
This thesis, w ritten by
Peter Lee Okada
under the direction o f — Thesis Committee,
and approved by a ll its members, has been pre
sented to and accepted by the D ean of T h e
G raduate School, in p a rtia l fulfillm ent o f the
requirements fo r the degree of
Master of Arts, East Asian Area Studies
^ IS COMMITTEE
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Table of Contents
Chapter: Page:
1. Introduction 1
Importance of Studying the Bubble Economy 3
Post-War Economic Development 5
Structure of the Thesis 7
2. Cause: Financial Crisis 9
Banking Crisis 14
Stock Market Crash 20
Land Fiasco 22
3. Consequence 1: Business Culture 27
Keiretsu Conglomerate 29
Corporate Materialism 32
Lifetime Employment 34
4. Consequence 2: Consumer Society 37
Spending Patterns 39
High Cost of Living 42
Consumer Confidence 44
5. Conclusion 49
Financial Restructure 51
Economic Revival 53
Reference List 55
i i
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Table of Figures
Figure: Page:
1. Bad Loans and Reserves 19
2. Land Price Index 26
3. Change in Consumption 41
4. Unemployment Rate 48
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Introduction
By definition, a Bubble Econom y is a term th a t describes an
economic system th a t allows a nation to benefit from a financial
expansion. In general, economic conditions are favorable. Signs of
prosperity are reflected in a tra d e surplus, healthy spending, and
high consumer confidence. O th e r indicators exist as well.
Essentially, a prosperous economy allows the bubble to expand.
A bubble economy is not limited to only one nation, and not all
economies fit this mold. However, we will be concerned with the
bubble economy of one particular nation: Japan. The Japanese bubble
economy was established in 1 9 8 5 as a result of an international
economic policy.1 For a period of several years, th e Japanese
economy benefited from a substantial expansion. This growth is one
of the most significant phenomenons of modern economics.
Some Japanese interpreted th e growth of the bubble economy
as a sign of national prosperity. During 1989, the economic gains
were known by some as the H eisei Boom.2 In contrast, Westerners
labeled the bubble as Japan, Incorporated., a collective of businesses
working as one. However, one fa c t was agreed upon, th e bubble
economy provided an environment for an unprecedented growth.
1 Duus, Peter; Modern Japan; Houghton Mifflin Company; Boston, MA; 1998; Page 346.
2 Hane, Mikiso; Modern Japan - A Historical Survey: Westview Press; Boulder, CO;
1992; Page 417.
1
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Historically, Japan is no stranger to economic expansion.
During the 1 9 6 0 ’s, throughout the 1 9 7 0 ’s, and into the 1980's, Japan
enjoyed considerable growth. Measured in term s of Gross National
Product (GNP), Japan surpassed most of Europe during the 1960’s. in
1970 , Japan’s GNP surpassed 20 0 biliion Doiiars (US), and became
the second richest industrialized nation.3 Only the United States had
a greater GNP which was approximately 5 0 0 billion Dollars.
The bubble’s creation in 1 9 85 served to accelerate Japan’s
economic growth. The bubble economy grew as it was fueled by such
factors as a trade surplus, and high spending. An expansive economy
allowed business confidence to be high. However, problems
materialized when some Japanese became over confident. This over
zealous attitude contributed to a sudden turn of events that caused
negative impacts on the longevity of Japan’s bubble economy.
The bubble burst in 1992, a m ere seven years after its
creation.4 The cause of the bubble’s burst is traced to the roots of
Japan’s financial crisis. Essentially, the financial expansion th a t
initially stimulated the growth of the bubble also played the role of
th e bubble’s demise. The bursting of th e bubble caused tw o
significant consequences to occur in the Japanese economy: change
in the business culture, and change in the consumer sodety.
3 Hane; Page 362.
4 Duus; Page 351.
2
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As a student of international business and East Asian studies,
I have been intrigued by the metamorphosis of Japan’s post-war
economic growth. How does one define a nation which was left in
ruins from a devastating defeat in war, transforming itself into one
of th e world’s econom ic giants in a m ere tw o decades?
Interestingly, Japan accomplished a similar change a century ago.
During the m ld -1800’s, Japan was forced open by American
military might led by Commodore Matthew Perry. Prior to this event
In 1853, Japan existed as a feudal state under the tig h t controls of
its Tokugaw a Government.5 The introduction of steam powered
ships into Edo Bay made the Japanese realize at how backwards their
closed society was. It was time for change. And Japan did change
from a feudal state to an imperialist power in a m atter of decades.
The importance of studying Japan’s bubble economy does not
involve its history, but rather its economic relationship with the
West, particularly the United States. Japan’s status as the second
richest economy in the industrialized world attra c ts constant
interest from the W est.6 From a Western point of view, Japanese
economic wealth is capable of adversely affecting the financial
stability of North American and Western European economies.
Hane; Pages 66.
Duus; Page 344.
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One facto r th a t is essentia! t o Japanese and W estern
economies is trade. For instance, the value of commerce exchanged
yearly between the United States and Japan is the highest in the
world. However, the trade surplus has remained in Japan’s favor. In
1990, the value of Japan’s trade surplus with the U.S. exceeded TOO
billion Dollars for the first time.7 As sta ted earlier, a trade surplus
was one element within the expanding Japanese bubble economy.
From an American economic perspective, the study of the
bubble economy’s collapse is vital to th e stability of our own
economy. As American consumers, we a re vulnerable to any form of
economic turmoil Japan may endure. T h e financial crisis could have
affected the cost of Japanese goods in the United States. For
consumers, th a t scenario would have been disastrous co n sid erin g
American demand for Japanese goods is often dictated by price.8
International trade is only one o f many reasons why th e
economic relationship between the U.S. and Japan is important. The
bubble is one chapter of the historical significance, of the economies
of the world’s two wealthiest industrialized nations. A brief
summary of Japan’s post-war econom ic development will establish
the basis for the importance of studying the rise and fall of the
bubble economy from the 1985 creation through th e 1992 burst
7 Hane; Page 388.
8 Duus; Page 352.
4
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Post-War Economic Development:
One of the hopes for Japan after its defeat in the Second World
War was development into a democratic nation. During the first half
o f the 1 9 0 0 ’s, Japan established itself as a colonial nation
following the steps of Western imperialism. However, the end of the
Pacific W ar in 1 9 4 5 also ended Japanese imperialism. Japan
required th e usage of another W estern ideology to re-build its
national infrastructure. The principles of Capitalism were the key.
The American Occupation from 1945 through 1 9 52 could be
credited for establishing a democratic government in Japan. In fact,
American General Douglas MacArthur vowed to transform Japan from
m ilitaristic sta te into a peace loving dem ocracy.9 However, a
democratic governm ent was step one of Japan’s rebuilding. Step two
tested w hether or not Capitalism was an appropriate economic
system for Japan. The Japanese were receptive to Capitalism.
Capitalism grew from within Japan. The American Occupation
simply provided th e dem ocratic fram ew ork. The practice of
Capitalism was not a new concept for the Japanese. It was the issue
of applying its principles to post-war economic developm ent th at
posed a challenge. However, from the start, th e builders of Japan’s
economic development exhibited determination to succeed.10
9 Duus; Page 256.
10 Duus; Page 258.
5
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The rebuilding of Japan’s economy received an unlikely boost
with the s ta rt of the Korean War in 1950. American Forces felt it
was co st e ffe c tiv e to u tilize Japanese fac to rie s in the
manufacturing of military hardware. This process benefited both
the Unites States and Japan. For the Japanese, it stimulated the
growth of heavy industry.11 As for the Americans, the geographical
closeness of Japan to Korea facilitated a faster supply route.
The years between the end of the American Occupation in 1952
until the bubble’s creation in 1985 could be described as Japan’s
economic revolution. Japan expanded its economy by developing a
trade surplus with the United States and many European nations,
while lim iting entry of foreign commerce into its dom estic
m a rk e t.12 A trade surplus obviously meant Japan was benefiting
from a financial expansion, an element of a bubble economy.
Flowever, the bubble economy was not created from a trade
surplus, or a financial expansion. A trade surplus and financial
expansion are rather factors within a bubble. Japan’s bubble
economy was the offspring o f an important international economic
event th a t occurred in 1 9 8 5 . Essentially, the history of post-war
economic development may have contributed to an environment that
fostered the inevitable creation of Japan’s bubble economy.
11 Hane; Page 364.
12 Hane; Page 365.
6
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Structure of the Thesis:
The structure of this thesis paper will follow a cause-effect
pattern. Thus far, we have established two relative points in a
timeline. First, the beginning of Japan’s bubble economy occurred in
1985. Second, the ending or bursting of the bubble occurred in 1992.
This paper will identify the causes of the bubble’s burst, and then
analyze the direct consequences. In doing so, this thesis has been
divided into chapters to differentiate causes from consequences.
Chapter Two identifies the events th a t led up to the creation
of the Japanese bubble economy in 1985. The following formula was
utilized. A trade surplus allowed an economic expansion, which
ultimately led to the bubble’s birth. The international economic
event th a t I referred to earlier is th e Plaza Accord, held in
September 1985 in New York. This doctrine essentially created the
bubble. Then, policies implemented in Japan expanded the entity.
The chapter continues by identifying the financial crisis as the
primary and possibly the sole cause of the bubble’s burst in 1992.
Three particular areas of the financial sector are listed. First, I
will introduce the banking problem, notably the bad debt issue.
Second, I proceed to the stock market crash of 1 99 0 from a record
high in 1989. And third, I conclude with the land fiasco, notably the
drop in the price index of real estate in Japan and overseas.
7
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Chapter Three analyzes the first of two consequences of the
bursting of the bubble economy. I will present argum ents of how
change occurred within the business culture of Japan’s economy.
Three elements of the business culture will be discussed. First, the
keiretsu break up. Second, the curtailing of corporate materialism.
And third, the end of lifetime employment. These Japanese business
practices have become nearly obsolete in the post-bubble period.
Chapter Four analyzes the second consequence of the bubble’s
burst. I will present arguments of how change occurred within the
consumer society of Japan’s economy. Again, three elements of this
consequence will be discussed. First, the decline in consumer
spending. Second, the change in the high cost of living. And third,
the lowering of consumer confidence. The bursting of the bubble
economy had a negative impact in the lives of Japan’s people.
Chapter Five serves as the conclusion of the thesis. I have
included a quick analysis of recent government policies implemented
to assist the revival of Japan’s economy. The examples include the
restructuring of the financial system and reassessing economic
practices. It is difficult to s ta te whether or not Japan is
completely over its recession as o f the year 2000. However, since
1992, Japan has made concerted efforts to revive its economy. The
bubble’s burst forced upon a redefinition of Japan’s economy.
8
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Cauae: Financial Crisis
The Japanese financial crisis of 1 9 9 0 and 1991 had a profound
affect on the bubble economy. Essentially, it caused the bubble to
burst. I m ust first answer w hat was Japan’s financial crisis. A
simple definition would state th a t the financial crisis resulted from
a slowdown of the economy. However, the crisis th a t Japan faced
was no simple matter. It was a rather complex phenomenon.
Japan’s financial crisis started to occur at the bubble’s peak in
1 9 9 0 . Up until th at time, Japan’s economy expanded utilizing two
factors: high levels of investing, and an export oriented trade. The
trade factor was possible due to the high quality of Japanese goods.
In addition, since the Yen was “floated”, its exchange rate was
determined by the market. A floating Yen allowed Japanese goods to
be com petitively priced in foreign markets. Thus, high quality and
competitive price granted Japan trade surpluses with the West.
The trade surplus was one factor th a t fueled Japan’s economy.
Initially, Japan seemed headed for economic dominance of the world.
A bubble economy would surely serve as an instrument to continue
expansion. So far, we know Japan’s bubble began in 1985. Now we
will be introduced to the im portant international event th a t gave
creation to the bubble. Then, we will proceed to discover w hat
elements of the financial crisis caused the bubble’s burst in 1 9 9 2 ,
9
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In September 1985, finance ministers representing the seven
w ealthiest industrialized nations met in New York to discuss
m atters related to international finance and tra d e .13 Dignitaries
from the United States, Japan, Britain, France, Germany, Italy, and
Canada were present a t the “Plaza Accord” meeting. This unusual
name was utilized due to the location of this event: the Plaza Hotel.
An important issue on hand was America’s high trade deficit.
The American trade deficit was noticeably bad with Japan and
Germany. As a result, the Plaza Accord was to serve as an
international agreem ent to drive down the value of the dollar.1 4
This policy action would help reduce America’s trade deficit with
both Japan and Germany. Japanese and German goods would become
more expensive in the American market, while American goods
would become more cheap in Japanese and German markets.
However, the founders of the Plaza Accord failed to view the
advantages of a strong Yen from Japan’s perspective. Initially,
Japan endured a recession in 1 9 8 6 due to Yen appreciation. There
were also fears that the revalued Yen would make Japanese exports
expensive. In actuality, the Yen facilitated Japanese investments
overseas. Hence, this expansion gave rise to the bubble economy.
13 Gibney, Frank: Unlocking the Bureaucrat's Kingdom: The Brookings Institution;
Washington D.C.; 1998; Page 6.
14 Wood, Christopher; The Bubble Economy: The Atlantic Monthly Press; New York, NY;
1 992; Page 23.
10
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The Plaza Accord was a blessing in disguise for some
Japanese. Depreciating the Dollar against tiie Yen was done on the
intent of reducing America’s trade deficit w ith Japan. However, Yen
appreciation allowed Japanese investments in America to be more
accessible. This was possible because Dollar depreciation made
American capital cheaper. Thus, the promise of a prosperous future
influenced the policy making of Japan’s bureaucratic elite.
The Japanese Government introduced two policies to utilize
the guidelines of the Plaza Accord. First, th e once tightly controlled
banking system was deregulated. Deregulation was necessary to
expose Japanese banks to international finance. The Ministry of
Finance wanted the banks to raise capital abroad, and gain new
custom ers.15 The strong Yen facilitated such ventures by reducing
the cost of obtaining foreign capital such as the American Dollar.
Second, the Ministry of Finance low ered interest rates on
borrowing. Lower interest rates would encourage Japanese to spend
and invest, at home and abroad. Full compliance by all banks to
lower interest rates did not occur im m ediately. Rather, it took a
period of several years.16 Banks were slow to respond due to fears
of income loss. Japanese banks relied on earnings gained from high
interest rates paid by loan borrowers to generate revenue.
15 Wood; Page 22.
16 Wood; Page 23.
1 1
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Implementation of these fiscal policies caused drastic changes
in the banks’ lending policies. Banks could no longer rely on lending
only to their traditional market: wealthy industrial conglomerates.
N on-traditional loan m arkets were utilized in lending to small
businesses and private individuals, especially land holders. Real
estate, in Japan, was a symbol of personal wealth. As a result,
banks th a t financed land investments gained benefits in return.
Yet, the fear of losing profit from the issuance of low interest
loans hovered like a black cloud over bank adm inistrators. To
abolish any concerns of financial setbacks, banks pursued a policy of
lending funds at an unprecedented rate. Obtaining a loan from a bank
became relatively easy considering economic conditions were high
due to the bubble.17 The premise of a strong economy clouded the
judgm ents of many banking officials to lend money liberally.
Banks pursued growth in their asset levels prim arily to
increase their share of the loan m arket. Because land was
considered a stable collateral, funding real estate investments made
financial sense. By June 1991, banks had lent over 100 trillion Yen
(1 trillion Dollars) to fund land acquisitions.18 However, there
existed one setback, investors had to pay a premium for land.
1 7 Bremner, Brian; “How the Mob Burned the Banks”; Businessweek; New York, NY;
January 29, 1996; Page 43.
18 Wood; Page 30.
12
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Investors who wanted to purchase real estate at a discount and
gain higher returns, had to acquire land holdings overseas. The
United States was prime tu rf due to th e Dollar depreciation.
Financing such investments was particularly risky. One reason: the
foreign branch network of Japanese banks had limited capital. Banks
had to borrow short and lend long to finance real estate investments
in the United States. A premium “Japan rate” was paid to New York
based money center banks such as Citicorp and Chase Manhattan.19
Although a risky venture, Japanese banks lent big in America.
During the late 1 9 8 0 ’s, it became routine to hear about Japanese
acquisitions o f valuable American real estate stretching from
M anhattan to Hollywood to W aikiki. In California, investors
purchased real estate during the m arket’s high end. The Japanese
virtually financed every new building in Downtown Los Angeles.20
Risky investments such as the preceding were synonymous
with th e expansion of Japan’s bubble economy. By 1990, the bubble
had reached its peak, then plateaued, and finally burst in 1992. But
why did this occur? The bubble burst due to the strains of th e
financial crisis. The negative fallou t of three financial sectors
caused this event: the banks, the stock market, and real estate.
19 Bremner, Brian; “And Now for the Really Bad News”; Businessweek: New York, NY;
July 10, 1995; Page 50.
20 Wood; Page 32.
13
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Banking Crisis:
The banking crisis was the product of an aggressive campaign
of lending. Pursuing asset growth and increasing market share were
the reasons behind the liberal lending policies of banks. Such bold
policies were in e ffe c t because banks were confident their
borrowers would payback loans. There existed little to no concern
that borrowers would default. Confidence was a virtue in Japanese
banking considering small provisions were made for loan losses.
The problem began when an increasing number of borrowers
became unable to payback loans. In 1990, the Japanese Government
initiated measures to “cool” the bubble’s growth.21 By th at time,
the bubble had swelled to its apex. Essentially, banks were a t their
peak rates of lending. As a result, one measure to slow the bubble’s
growth materialized in the announcement interest rates were to be
raised. The Ministry of Finance intended to decrease borrowing.
News of a rise in interest rates were not received with open
arms by the Japanese public. Investors responded with panic
speculation th a t an economic recession was eminent. There were
also concerns by some about how to finance future investments. The
first signs of defaulted or non-performing loans began to surface in
fiscal year 1991 on the balance sheets of top Japanese banks.22
21 Gibney; Page 7.
22 Wood; Page 39.
14
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For fiscal year 1991, defaulted loans from all Japanese banks
totaled some 8 trillion Yen (8 0 billion Dollars). Initially, this trend
was not viewed with much concern by Japan’s major banking centers.
In fact, it was estimated th a t for the next three consecutive fiscal
years, reported defaulted loans would decrease.23 Defaulted loans
continued to rise every year. By fiscal year 1998, non-performing
loans ballooned to total over 30 trillion Yen (3 0 0 billion Dollars).
Virtually every major bank was not immune from the bad loan
disease. Many of Japan’s elite financial titans were included in this
<;roup. More than a dozen banks reported defaulted loans valued at
•over 1 trillion Yen (1 0 billion Dollars) in fiscal year 1 9 9 8 .24 The
iiighest reported loss was from the Bank o f Tokyo-Mitsubishi group
•with a figure of nearly 2.4 trillion Yen (2 4 billion Dollars). This
am ount represented an alarming 6 percent of the bank’s total loans.
Although the roots of the banking crisis were embedded in the
astronomical figures represented by defaulted loans, an even deeper
source existed. Japanese banks were ill prepared for handling such a
large sum of defaulted loans. The rapid expansion of the bubble
economy during the late 1 9 8 0 ’s convinced banks outstanding loans
would be paid back. However, this was true only if borrowers gained
investm ent returns. Failed investments resulted in loan default.
2 3 Wood; Page 40.
2 4 Gibney; Page 226.
15
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A big problem with Japanese banks was the relatively low
ratios placed on loan loss reserves. Loan loss reserves represented
a percentage o f total assets th a t were required to be set aside to
cover non-performing loans. In Japan, the industry standard was a
mere 0.3 percent of total loans.25 Panic speculation caused a much
greater percentage of loans to default. The government mandated
loan loss reserves were far from being adequate. (See Figure 1)
In comparison, banking institutions in the United States are
required by federal law, to establish a loan loss reserve of at least
2 .0 percent of total loans. American banks usually refer to this
ratio as an allowance for uncollectible loans. Banks must practice
this policy if they wish their deposits to be insured by the Federal
Deposit Insurance Corporation (FDIC). In Japan, no such equivalent
arrangement exists. Outstanding loans are assumed to be repaid.
Two reasons exist to why fiscal policy in Japan requires such
a low ratio for loan loss, and does not insure banking deposits.
First, there are little incentives for Japanese banks to increase
their loan loss reserves because the government taxed severely on
loan insolvency. Second, loan loss reserves were considered
unnecessary because Japanese banks regarded their capital gains on
long term shareholdings as a means to counter defaulted loans.26
25 Gibney; Page 226.
26 Wood; Page 41.
16
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As more and more defaulted loans began to m aterialize on
balance sheets, Japanese banks utilized a variety of tactics to hide
or rather not report financial losses to the government and the
public. Initially, the standard practice was the belief th a t banking
problems will correct themselves. Another method was to simply
deny any losses had occurred. However, such over zealous actions
became quickly obsolete so other creative means were utilized.
A common method to cover up losses from defaulted loans was
to “dress up” one’s books. Dressing up the bank’s books required the
simple practice of over-em phasizing the gains to discredit the
losses. Two means of dressing up included: revaluing stockholdings
and revaluing landholdings.27 Revaluation was done by calculating
the books using the American style fiscal year of October 1st -
September 30th, instead of the Japanese April 1st - March 30th.
Redefining fiscal years often increased earnings and assets.
Banks used such tricky financial planning to conceal their
mishaps. The fact of the m atter was th at banks had lent too much
money in a short period.28 Although, banks thrived on the expanding
bubble economy, they paid little attention to the implications of
deregulation. Little consideration was given to defaulted loans.
27 Landers, Peter; “Creative Cooking”; Far Eastern Economic Review: Hong Kong; April
9, 1998; Page 64.
28 Wood; Page 42.
17
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Japanese banks would not announce financial losses from non
performing loans for two reasons. First, com pany pride was a t
stake. Any reported losses would destroy banks’ relations with its
customers: industrial companies and private consumers. Second,
political pressures hindered banks from going public with news of
financial turmoil. The reporting of losses was considered to be a
step closer to filing for bankruptcy: a taboo in Japanese business.
Corporate bankruptcy had been discouraged by the Japanese
Government for decades. Even banks with substantially high non
performing loans were prevented from going under. Financially
strapped banks were given one option: purchase their own bad loans
with company equity, and pay themselves in te re s t.29 This was a
perfect scheme since banks could now receive a tax write o ff on
these purchased bad loans. Unfortunately, it was not successful.
Financially unstable banks and o th e r m oney lending
institutions eventually faced the inevitable: bankruptcy. In
September 1998, Japan Leasing Corporation, a subsidiary of the Long
Term Credit Bank of Japan (LTCB) filed fo r the largest ever
bankruptcy valued a t 2.2 trillion Yen (2 2 billion Dollars).30 The
banking crisis started with bad loans and ended with bankruptcy.
29 Gibney; Page 228.
30 Landers, Peter; “Debt Scramble”; Far Eastern Economic Review: Hong Kong; October
8, 1998; Page 106.
18
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Figure 1 : Comparison of bad loans and bad-loan reserves in Japanese
banking institutions (for fiscal year ending March 31,1998).
Figures are in trillions of Yen.
Source: Japan Economic Almanac 1999
25
■ Bad loans
□ Reserves
City Credit Trust Major
Stock Market Crash:
The Nikkei index, or the Tokyo Stock Market was one type of
instrument in measuring the expansive boom of the bubble economy
during the late 1 9 8 0 ’s. In December 1 9 8 9 , a milestone in the
Japanese stock m arket was established. A record close of 3 8 ,9 1 0
was recorded just before the close of the 8 0 ’s decade.31 This value
was the product of nearly five years of rapid economic growth.
Whatever goes up, must come down is a theory of gravity th a t
is cited by simple physics. This rule was certainly true in business
as well. On October 1, 1990, not more than nine months after the
Nikkei set a high, the Japanese stock m arket crashed. The market
had plummeted to close at less than 2 0 ,0 0 0 .32 The Nikkei index had
lost an incredible 4 8 percent of its value in less than a year.
After the 1 9 9 0 crash, the Nikkei index hovered close to the
2 0 ,0 0 0 level and never saw the daylight of bubble economy
expansion again. By 19 92, the index had fallen close to the 1 5 ,0 0 0
level. This value was over an astonishing 6 0 percent below its peak
just three years earlier. Finally, in June 1 9 9 5 , an all time low was
established as the Nikkei index closed a t 1 4 ,4 8 5 . A decline in the
stock market was an indication th at a recession was imminent.
31 Gibney; Page 6.
32 Bremner, Brian; “The Jolt that Japan Needs?”; Businessweek: New York, NY; April
13, 1998; Page 28.
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News of the stock m arket crash in 1 9 9 0 added to the panic
speculation which caused bank loans to go sour. Banking institutions
in Japan were concerned with the fall in the Nikkei index considering
the close relationship the stock market had with the banking sector.
W hat was of greater concern was the Nikkei index served as an
indicator to determine the stability of Japan’s economy. Instability
in the stock market caused an increasing number of loans to default.
Banks were rather sensitive to the affairs of the Nikkei. One
particular reason: its capital was dependent on the fluctuations of
the Nikkei index. As a result, its ability to lend money went up and
down, in accordance with the “roller coaster ride” of th e stock
m a rk e t.33 The capital of the world’s largest banks were at the
mercy of the short term changes of the Nikkei index. As a result,
when the market closed low, the banks’ ability to lend declined.
An increasing number of outstanding loans continued to default
as a result of the Nikkei’s persistent poor performance. Banks had
to utilize its capital gains as a buffer against non-performing loans.
Therefore, capital was severely depleted. In fact, Japanese banks
may sit on over 500 billion Dollars of bad loans.34 A vicious cycle
commenced as defaulted loans increased, lending ability decreased.
33 Gibney: Page 220.
34 Silverman, Gary; “The Slowest Fire Sale on Earth”; Businessweek: New York, NY;
July 27, 1998; Page 42.
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Land Fiasco:
The land fiasco resulted when real estate, within the Japanese
market, plunged in value over a period of time. This factor was the
third element th a t contributed to the financial crisis. Historically,
high real estate prices in Japan has its roots in a feudalistic system
which states possession of land brings status to an individual. This
belief has nurtured a som ewhat conceited mentality th a t stated
value of land will increase regardless of economic conditions.
In reality, land prices fluctuated up and down. However,
Japanese real e s ta te investors were blind to even consider a fall in
property value. It was not surprising considering this statistic. In
1990, the accumulated value of land in Japan stood a t a mind-
boggling 2 quadrillion Yen (2 0 trillion Dollars).35 This value was
four times the value of total real estate in the United States.
Japan’s land boom began in 1 9 85 , in conjunction with the
deregulation of banks, and lowering of interest rates. In the eyes of
an investor, land was a profitable venture. From the banks’
perspective, land was a valuable form of collateral.36 Therefore,
lending funds to finance real estate purchases surged. The high
demand to acquire land forced property prices to skyrocket.
35 Wood; Page 50.
36 Sakurada, Keiji; “Picking Up the Tab for Past Indiscretions”; Tokyo Business Today:
Tokyo; March 1995; Page 5.
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The land boom came to an abrupt end in 1990. In April of th at
year, th e Ministry of Finance initiated credit controls on property
loans to slow the rise in land values.37 The government wanted to
curtail th e “greed-like” impulses of real estate investors. Banks
were limited to extending a smail percentage of total loans to real
estate financing. This policy posed a problem because during the
bubble era, banks became accustomed to financing real estate.
The Japanese public responded to this fiscal policy by
expressing deep concern over the credit crunches imposed on real
estate financing. Speculation began to spread th at this action was a
prelude to a nationwide, and even worldwide economic recession.
This prompted a report to be published by Mitsubishi Bank citing an
alarming possibility. The findings stated land values could fall by
over 50 percent by 1994 resulting in a loss of 10 trillion Yen.38
Panic speculation erupted among real estate investors. An
economic recession m eant th a t investm ents would fall in value
causing low returns. Property owners took two courses of action.
First, investors attem pted to sell o ff land which exhibited low
returns. The selling of land included both domestic and overseas
investm ents. Second, their demand for new land acquisitions
declined. This shortage in demand, in effect, lowered land prices.
37 Wood; Page 52.
38 Wood; Page 55.
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During the bubble expansion, Japanese real estate investors
purchased land in the United States a t a premium. Investments
increased from just 2 billion Dollars in 19 85 to 1 5 billion Dollars in
1 9 8 9 .39 Real estate purchases included practically every form of
property from luxurious homes to m agnificent golf courses.
Nowhere was Japanese real estate investments more apparent than
in California. The Golden State was Japan’s trophy property.
A fatal mistake was made by investing in the California real
estate market. In 1991, a recession in the American economy caused
real estate values in California to plummet. This was rather
unfortunate timing because only a year earlier, the Japanese real
estate m arket was rocked with the news of lending limitations on
land investments which sparked a panic. Japanese landholdings in
the United States faced the prospect of being sold rather quickly.
Selling land in the overseas m arket proved to be quite a
challenge. During the bubble expansion of the late 1 9 8 0 ’s, Japanese
investors purchased a series of American real estate a t a premium
cost. However, due to the economic recession, the Japanese were
left to sell landholdings a t a discount.40 Real estate was sold at a
fraction of the originally purchased price. As a result, Japanese real
estate investors had to assume financially gripping losses.
39 Wood; Page 59.
40 Wood; Page 67.
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Surprisingly enough, the property devaluation in the United
States was minor compared to problems within the Japanese real
estate market. The challenge here was the correlation between
declining demand and decreasing price in property. Demand for land
was dictated by the prospects of the economy’s condition. Public
anxiety about the future resulted in a drop in demand for both
commercial and residential real estate causing land prices to fall.
An interesting historical comparison comes to note. In 1927,
shortly after Emperor Hirohito was throned, a financial panic ensued.
This Showa panic had adverse affects on land prices. By the start of
the worldwide depression in 19 30, real estate values in Japan
plummeted. Over 60 years later, history was repeated. In 1990, a
year after Emperor Akihito came to the throne, the Heisei panic
caused a drop in land prices.41 From 1991, a free fall commenced.
Lower prices should have enticed people to purchase real
estate. However, the Japanese public had become very uneasy about
the economy. Demand for land continued to decline. From 1990,
Japan’s three most important real estate markets: Tokyo, Osaka, and
Nagoya experienced drops in price index of up to 50 percent.42 (See
Figure 2) The land fiasco sealed the fate of the financial crisis.
41 Kudo, Yasushi; “No Bottom in Sight”; Tokyo Business Today: Tokyo; November 1995;
Page 11.
42 Wood; Page 53.
25
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Figure 2: The land price index in Japan’s three largest cities
(Tokyo, Osaka, and Nagoya) for the years 1990-1998.
The base index year of 100 is 1983.
Source: Japan Economic Almanac 1999
300
250
200
150
100
50
0
1990 1992 1994 1996 1998
ro
O ')
■ Commercial
□ Residential
Consequence 1: Business Culture
The financial crisis did n ot only end the bubble economy, but
also caused the dismantling o f Japan’s traditional business culture.
Bursting the bubble economy initiated significant consequences. One
consequence involved changes to Japan’s conservative corporate
environment. Such changes questioned as to whether or not the
business practices established in the past were still valid. The end
of the bubble economy posed a serious question to Japan’s future.
Up until the bursting of the bubble in 1992, business in Japan
was influenced by cultural ideologies d ifferent from the West.
These differences had indirect influences of Confucian teachings,
one of the foundations of Asian philosophy. For example, Japanese
business culture discouraged individualism in favor of group
consensus.43 Other differences included hierarchy and loyalty.
In actuality, Japanese business has fostered a culture where
change from the norm is often nonexistent. Perhaps this is why
Japanese corporations have not deviated from business practices
established after the Occupation some 50 years ago.44 Resistance to
change has been the cornerstone of Japanese business culture. Only
an historical event, like the bubble’s burst, could cause change.
43 Yoshimura, Noboru and Philip Anderson; Inside the Kaisha - Demystifying Japanese
Business Behavior: Harvard University Press; Cambridge, MA; 1997; Page 1 90.
44 Johnson, Chalmers; Japan: Who Governs?: W.W. Norton & Company, Inc.; New York,
NY; 1995; Page 66.
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The development of corporate structure in Japan could be
described as a modern economic rebirth. Essentially, when the
economy was modernized during the postwar years, business
entities were given a new identity. This new entity was capitalism,
however with Japanese modifications. Economic development in
Japan was a means to regain national self-respect.45 This new
principle served to provide an environment suitable for a bubble.
Corporate Japan had a weakness: the presumption th a t the
business world would remain the same indefinitely. However, what
may have been acceptable business practice during the 1 9 5 0 ’s, was
not feasible during the 1 9 9 0 ’s. Yet, Japanese corporations neglected
to change with the world economy as tim e dictated. The reason:
business culture in Japan developed into a complex network in which
change only came from within, and rarely from the outside.46
The bubble economy was a system which existed within Japan.
When the bubble burst in 1992, change from within was forced upon
the business culture. Japanese corporate entities were made to
realize the business practices of the past were slowly expiring. In
order to survive in the world after the bubble, change was necessary.
Core elements of the bubble th at became obsolete after the burst
included: the keiretsu, corporate materialism, and life employment.
45 Johnson; Page 105.
46 Yoshimura and Anderson; Page 33.
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Keiretsu Conglom erate:
A k e ire ts u is a Japanese term used in describing a giant
industrial group. It is similar to a conglom erate, but th e
relationship between every segment which make up the group is
more intimate. In m any ways, the keiretsu is similar to the prewar
zaibatsu industrial groups. However, the zaibatsu was dismantled
during the Occupation years. Interestingly, the four zaibatsu th a t
re-emerged as keiretsu are: Fuji, Mitsubishi, Mitsui, and Yasuda.
What is striking about the keiretsu is its structure. It is
unlike the standard conglomerate found in Western economies. A
keiretsu is a “w eb network” which inter-connects hundreds to
thousands of companies. W hat is notable is th a t every company in
the web has stock ownership in every participant of the keiretsu.47
This practice is allowed to ensure all keiretsu members benefit
from business activities, and to protect each other’s interests.
The web network is relatively straightforward. First, a t the
heart of the web is an industrial entity. Second, on the branches of
the web are hundreds of subsidiaries. Third, there is a central bank
which finances the conglomerate. This tightly controlled network
exists to p ro te c t industries in Japan, and to lim it foreign
competition.48 The keiretsu thrived within the bubble economy.
47 Johnson; Page 63.
48 Johnson; Page 83.
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As impressive as the keiretsu structure may have been, it was
not without faults. The keiretsu’s weakness was its resistance to
change its structure. When the bubble burst, a wave of change was
forced upon corporate Japan. As a result, the web network that once
served as the basis for corporate structure was vulnerable to
division. During the post bubble era, the keiretsu was redefined.
Many faced “break ups” in the form of mergers and acquisitions.
Mergers and acquisitions occurred betw een Japanese
companies, but rarely with foreigners. During th e 1 9 9 0 ’s, some
titans of Japanese business even had to succumb to takeovers. In
1 9 9 9 , what was believed to be impossible had happened to a
keiretsu: takeover by a foreigner. In May, Nissan accepted a takeover
bid valued at over 5 billion Dollars from France’s Renault.49 The
financially troubled company gave up 35 percent of its ownership.
In truth, this foreign acquisition of the keiretsu was not as
shocking as Nissan’s performance over the last decade. Nissan was a
perfect example of a keiretsu th at resisted change upon the bubble’s
burst. A fter the bubble’s burst, Nissan’s global m arket share
dropped from 6.5 percent in 1992, to less than 5 percent in 1 9 99 .50
Nissan’s demise was its inability to adapt to the post bubble era.
49 Thornton, Emily; “Remaking Nissan”; Businessweek; New York, NY; November 1 5,
1999; Page 71.
50 Thornton; Page 72.
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It should be noted that not all of Japan’s keiretsu succumbed
to Nissan’s fate. Other keiretsu such as Toyota and Honda still
continue to prosper. However, the longevity of these two auto giants
required significant restructuring of their respective keiretsu. The
bubble’s afterm ath proved th a t no promises existed within the
keiretsu. In response, a new business trend emerged as the once
mighty keiretsu faced financial turmoil. It was entrepreneurship.
Japanese entrepreneurship is a business concept th a t some
describe as a modified keiretsu. It is a term th a t had always
existed in Japanese business jargon. For example, the world famous
Sony Corporation was started by an entrepreneur named Akio Morita.
There exists one Japanese entrepreneur who is synonymous with
redefining the keiretsu: Masayoshi Son. Son is the founder of the
Softbank Corporation, a firm th a t is a post-bubble keiretsu.51
Softbank has often been labeled as Japan’s version of the
Microsoft Corporation. However, Son’s success did not come from
mimicking an American brand. Rather, Softbank succeeded in the
post bubble era by cornering the internet business market. In fact,
it was already a billion dollar corporation at the dawn o f the
bubble’s burst.52 Entrepreneurship was the “new” keiretsu.
51 Himelstein, Linda; “Softbank’s Cyber Keiretsu”; Businessweek: New York, NY; April
5, 1999; Page 56.
52 Himelstein; Page 57.
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Corporate Materialism:
The reorganization of the keiretsu modified the basic practice
o f business in Japan. During the bubble economy years of 1 9 8 5 -
1992, Japanese corporations redefined materialism. Spending was
a t astounding levels, and foreign investm ents had peaked to
significant levels. The signs of avarice were noticeable in Japanese
acquisitions of high priced commodities and overseas businesses.
When the bubble burst, materialism transformed into frugality.
Changes in attitude toward corporate spending began to
m aterialize when Japanese companies began to sell their acquired
wealth both in Japan and abroad. The financial sector had initiated a
global w ithdraw al.53 Banking institutions: D aiw a, and H okuriku
planned to close all foreign operations. While securities firms:
Nomura and Nikko planned to cut foreign operations by up to half.
Frugality also emerged as the once cherished symbols of
wealth were put up for sale. Companies in financial turmoil had to
sell its prized investments at a loss. In 1997, Daishow a Paper
Company sold Vincent Van Gogh’s Portrait of Doctor Gachet for 50
million Dollars.54 They had paid 8 2 .5 million to acquire it in 1990.
Bubble era fortunes had to be surrendered for economic survival.
53 Landers, Peter; “Headlong Retreat”; Far Eastern Economic Review: Hong Kong;
November 5, 1998; Page 45.
54 Amaha, Eriko; “Not a Pretty Picture”; Far Eastern Economic Review: Hong Kong; June
4, 1998; Page 71.
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Curtailing overseas operations and selling valuable assets
were only one facet o f th e end of corporate materialism . As
companies withdrew their foreign businesses and consolidated their
remaining wealth, it became rather apparent th at Japanese business
practices were no longer feasible. As a result, foreign alternatives
became more and more attractive. The doors th a t prevented foreign
competition in vital industries finally opened to the outside.
Back in 1 9 8 5 , foreign financial institutions in Japan were
limited in business activities. However as the bubble emerged,
financial deregulation began to reduce restrictions on banking and
fin a n c e .55 The bubble’s burst accelerated the entry of foreign
financial institutions into Japan. American style banking such as
the selling of mutual funds became common in Japanese finance.
The lifting of restrictions also invited fa ir com petition.
Corporate materialism was perhaps ram pant due to the lack of
foreign competition. For example, in retail, a few departm ent stores
including Mitsukoshi initially enjoyed an oligopoly. However, when
com petitors such as Am erican Malls International entered the
m arket, Mitsukoshi’s sales slumped.56 Oligopolies contributed to
corporate materialism. The bubble’s burst contributed to its end.
55 Amaha, Eriko; “Opening Up”; Far Eastern Economic Review: Hong Kong; April 2, 1998;
Page 53.
56 Landers, Peter; “Crumbling Pillars”; Far Eastern Economic Review: Hong Kong; June
25, 1998; Page 60.
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Lifetim e Employment:
The promise of lifetim e em ploym ent is an incentive only
Japanese workers have in the industrial world. This policy states
when a prospective candidate is granted an employment position, he
is technically the company’s employee until retirem ent From an
employee’s perspective, this was th e perfect form of job security.
For the employer, this practice guaranteed th at employment would
be at full capacity, and in theory, at the apex of productivity.
Lifetim e em ploym ent gave Japanese workers the dubious
distinction as th e w orld’s g re a te s t workaholics. A b e tte r
description is the salaryman. The salaryman exemplified the typical
white collar office worker. He joins a company straight o u t of
college, and work his way up the corporate ladder. In many cases,
the speed at which he advanced up the corporate totem pole depended
on who he knew.57 Connections were vital to success in Japan.
The Japanese corporate ladder utilized the theory of company
hierarchy. Seniority was a param ount consideration when an
em ployee was p ro m o ted .58 The emphasis on seniority often
prevented better qualified employees from promotion. Essentially,
the next person on the hierarchy chain was promoted first, even
though his qualifications were less than someone ranked lower.
57 Yoshimura and Anderson; Page 38.
58 Yoshimura and Anderson; Page 186.
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What is striking about lifetime employment is the rarity in
dismissals of an unproductive employee. Lifetime employment is a
binding contract which is difficult to break. A salaryman th a t is
deemed unproductive is not terminated, but rather transferred to
another d ep artm en t.59 The transferring of employees was an
inefficient attem pt at continuously trying to boost productivity.
The process of lifetime employment was practical during the
bubble economy era. However, since the burst, the Japanese had to
embrace the Western practice of “at-w ill” em ploym ent.60 By
definition, at-will em ploym ent states th a t either an employer or
employee has the ability to end a work contract a t anytime. This
concept was difficult for Japanese to understand since they believed
a company and its workers have an indefinite relationship.
At-will employment was a financial necessity during a period
when cost reductions were indispensable to prolonging a company’s
life. Lifetime employment worked well when a company had funds to
continuously pay productive and unproductive workers. However, the
bursting of the bubble tightened corporate belts, and ended such
spending practices. Companies had to decide which individuals to
keep in employment, and which workers had to be dismissed.
59 Bremner, Brian; “A New Japan”; Businessweek: New York, NY; October 25, 1 999;
Page 70.
60 Thornton, Emily; “No Room at the Top”; Businessweek: New York, NY; August 9,
1 999; Page 50.
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Dismissals or “firing” o f employees had been a taboo in
corporate Japan until recent years. It should be n o te d th a t
companies did dismiss employees in the past. But, it was done
rarely, and discretely. As the financial strains of the p o s t bubble
era wound its way into th e heart of business in stitu tio n s,
dismissals of unproductive employees became common. It was a
pattern th at affected all employment levels including executives.
The loss of job security was a frightening reality fo r anyone
employed in Japan. Lifetime employment, which was once a right,
was now a distant memory. For the salaryman, this prospect was
utterly scary considering he was molded to follow the institutional
corporate hierarchy. However, the new practice of at-will
employment was a blessing in disguise. The backbones o f the white
collar world were free to go where they were most productive.61
Current employment relationships between a com pany and
worker requires all employees to be productive or go. As more and
more Japanese firms follow in this step, the business culture
becomes closer to resembling the American model.62 The bursting of
the bubble had substantial effects on Japan’s business culture.
However, on the positive side, it has forced corporations to become
more efficient, and better prepared to m eet tomorrow’s challenges.
61 Bremner; Page 70.
62 Thornton; Page 50.
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Consequence 2: Consumer Society
The second consequence of the bubble’s burst involved changes
to the consumer society in Japan. As in any industrial nation, the
population is a vital requirement for Japan’s economic stability.
Consumer spending fueled the engines th a t turn the wheels of the
business cycle. In fact, a core theory of economics defines GNP as
the sum of a nation’s economic activities within a fiscal year. For
Japan’s bubble, consumption is a significant economic activity.
During the bubble economy era, the Japanese were nicknamed
as the world’s most materialistic consumers. They were given this
title due to the immense amount of disposable income exhibited in
spending. Based on the economic principle of per capita income, the
average Japanese citizen is wealthier than Americans, and m ost
Europeans. However, due to high living costs in Japan, monetary
wealth does not go far as it would in other industrial nations.63
Japanese consumers were willing to spend disposable income
as long as two conditions were satisfied: one, sufficient money was
available and two, economic conditions were good. The Japanese are
sensitive to their nation’s economic status.64 Therefore, if news of
the economy was bad, consumer reaction would be negative.
63 Woronoff, Jon; The Japanese Economic Crisis: St. Martin Press; New York, NY; 1993;
Page 100.
64 Posen, Adam Simon; Restoring Japan’s Economic Growth: Institute for International
Economics; Washington D.C.; 1998; Page 88.
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The bursting of the bubble was perhaps the w orst economic
news the Japanese consumer could receive. This economic tragedy
had an adverse effect on how the Japanese consumer society would
exist from then on. From 1 9 9 2 , a trend started to occur amongst the
consuming population. The once materialistic Japanese consumer
began to slowly diminish. People opted to “play it safe”, and started
to exhibit frugality when deciding to purchase goods and services.
Consumers were also given a cruel reality check. The bubble’s
burst m eant th at the economic slowdown would decrease disposable
income levels available for spending. The reason: corporate Japan
was no longer capable of providing the salaries th a t contributed to
high disposable incom es.65 This was a frightening prospect
considering although the econom y slowed, th e cost o f living
continued to rise. Income became a precious commodity for many.
In addition, society began to express concern over the future.
As a result, consumer confidence was at one of the lowest levels
since the end of the w ar.66 The post bubble era introduced the
consumer society to a vicious circle: an economic recession leads to
lower incomes which leads to decrease in consumption. Change
occurred in the following elem ents of the consumer society:
spending patterns, high cost of living, and consumer confidence.
65 Woronoff; Page 112.
66 Posen; Page 90.
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Spending Patterns:
During the bubble economy years of 1 9 8 5 -1 9 9 2 , Japanese
consumers indulged themselves in an economic trend: relentless
spending. The expanding economy facilitated peoples’ desires to
purchase luxurious and expensive merchandise. Perhaps this
practice was a means to gain wealth in a status oriented nation.
Materialism was a good method to obtaining yutori, or “the good
lif e ”. 67 Many sought yutori, but very few actually achieved it.
The Japanese are no d iffe re n t from their W estern
counterparts, or any consumers for th a t matter. A central theory of
capitalism states th a t humans strive for the pursuit of wealth.
Simply, wealth is interpreted as a measure of success. Materialism
is an excellent means to express one’s wealth. Once wealth was
reached, the pursuit of the good life was accomplished. However,
Japanese desires to reach yutori depended on exterior factors.
The journey to reach the good life took a dramatic detour when
the bubble burst in 1992. A weakened economy was a hindrance to
healthy spending patterns. Therefore, Japanese consumers began to
express reluctance in spending. The fear of going into debt
convinced many consumers to spend disposable income more
wisely.68 The road to yutori suddenly had become much longer.
67 Woronoff; Page 128.
68 “Japan’s Debt-Ridden Future”; The Economist: London; August 3, 1996; Page 31.
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Spending patterns also dropped noticeably a t the corporate
levels. In referring back to business culture, a corporate practice of
hospitality has existed for years within the spending budgets of
Japanese companies. It is called settai, or gift giving.69 Settai has
been reduced in recent years as corporate spending budgets have
shrunk. Interestingly, in fiscal year 1992, the National Tax Agency
estimated total settai in corporate Japan surpassed 6 trillion Yen.
Such high amounts in gift giving, or any form of spending is
normal in Japan. Consumers have been used to paying exorbitant
amounts for goods, even the “made in Japan” items. The high cost of
living was tolerable when economic growth provided adequate
disposable income. However, when the bubble burst, a slowing of
real GNP growth became apparent. Slow economic growth resulted
in a decrease in year to year consumption patterns. (See figure 3)
The economic recession has made the expensive domestic
market an uninviting venue for consumers. Instead, foreign markets
have become more attractive. Japanese consumers who traveled
abroad, discovered th a t “made in Japan” goods w ere cheaper
overseas.70 As a result, consumption of goods in overseas markets
increased, in the eyes of the consumer, it was more economical.
69 Kakuchi, Suvendrini; “Party Poopers”; Asian Business: Hong Kong; October 1999;
Page 66.
70 Woronoff; Page 119.
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Figure 3: Comparison of percentage change in consumption and
percentage change in real GNP growth (for the years 1990-1998).
Source: Japan Economic Almanac 1999
■ Consumption
□ GNP growth
High Cost of Living:
There is a particular reason why Japanese consumers have to
face high costs in purchasing goods and services. In an export
oriented economy such as Japan, the cost of goods is adversely
affected by price inflation. The price index is high because
manufacturers routinely inflate the price of goods sold in the
domestic m arket to subsidize exports.71 In effect, Japanese goods
sold in foreign markets are often priced lower than in Japan.
In addition, the distribution system in Japan also adds to the
high cost of consumer goods. For example, in the United States, a
good is priced as it exchange hands from the following: manufacturer
to wholesaler to retailer to consumer. In Japan, this exchange of
hands includes several more steps. Each exchange pushes the price
of the goods higher. When the goods finally reach the market, the
consumer has to pay a price that was created from profiteering.
A question comes up to why Japanese goods endure so many
exchange of hands from manufacturer to consumer. The answer is
simple: m anufacturers collude with distributors to limit foreign
com petition.72 Foreign goods are also priced as it goes through the
lengthy distribution system. If foreign goods are expensive, the
Japanese consumer will be forced to purchase domestic ones.
71 Woronoff; Page 115.
72 Woronoff; Page 117.
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In theory, the Japanese distribution system makes economic
sense as it protects the home m a rket from potential foreign
domination. But, in practice, it hurts an important factor in the
economic cycle: the consumers. Up until the peak of the bubble
economy, consumers had tolerated the high cost of living. When the
bubble burst in 1992, consumers realized that the high price index
was unbearable. As a result, consumption levels decreased.
As consumption patterns continued to decrease, business was
made difficult for retail chains. The bubble’s burst hurt retailers,
as it discouraged consumers from spending. For example, two of
Japan’s largest retailers, D a ie i and M ycal, have disclosed
substantial losses.73 For the fiscal year ending March 31, 1999,
Daiei endured over a 41 billion Yen loss in net income, while Mycal
came in second place by reporting losses over 35 billion Yen.
The price index has become a greater indicator of consumer
elasticity during the post-bubble years. Retailers have discovered
that consumers are more sensitive to price increases. Consumers no
longer have the funds to spend liberally as they once did. In
addition, the years of high economic growth are in the past. Since
1992, the change in year to year GNP growth has not exceeded 5
percent.74 Retailers had to lower prices to entice spending.
73 Jameson, Sam; “Steady Does It”; Asian Business: Hong Kong; July 1999; Page 12.
74 “A Costly Battle Against Recession”; The Economist: London; June 8, 1996; Page 41.
43
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Consumer Confidence:
Perhaps the most dire change to Japan's consumer society is
consumer confidence. The bubble’s burst had a tremendously
negative effect on the seif esteem of the consuming population, in
fact, many feel th a t the post-bubbie problem Japan has to face is a
crisis in confidence.75 Although it is has been several years since
the bubble’s burst, th e scars still remain. Due to these ills, the
consumer society no longer trust the economy as they once did.
This m istrust has hindered any attem pts a t a full economic
recovery. Various economic indicators imply th a t consumers may
never exhibit confidence levels maintained during the bubble years
of 1 9 8 5 -1 9 9 2 . For example, signs of high confidence such as
healthy consumption and borrowing from banks are becoming less
noticeable. The new trends in post-bubble Japan center around
financial survival, and how to cope with anxiety about the future.
People are particularly anxious about the following: job
security, living standards, and retirem ent.76 These worries are the
primary obstacles holding back high consumer confidence, in other
words, consumers are not spending money due to these factors. They
prefer to save for the future in hopes of easing their anxiety.
75 Bremner, Brian; “Japan’s Real Crisis”; Businessweek; New York, NY; May 18, 1998;
Page 138.
76 Bremner; Page 140.
44
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The anxiety of consumers is fueled by certain factors in the
economy. As mentioned, low living standards are a deterrence to
positive confidence. One aspect of living standards is particularly
notable. It is the income tax rate th a t the working Japanese public
has to endure. Paying tax on earnings is custom ary worldwide.
However, the Japanese are perhaps the world’s most heavily taxed at
a maximum bracket of 50 percent of total gross income earned.77
Confidence levels could hardly be high for anyone, Japanese or
not, who has to endure such astounding tax rates. Matters are made
worse considering post-bubble era jobs do not pay as much as they
once did. As a result, high taxes lower disposable income which is
vital to spending. This leads to even more troubling hindrance to
consumer confidence: the slowly rising unemployment rate.
During the bubble years, Japan enjoyed a very low
unemployment rate. It was the lowest in the industrialized world.
However, the post-bubble era has pushed the rate up to Western
levels. There were once worries th a t the unemployment rate could
hit 10 percent.78 Luckily, th at concern never became a reality. Yet,
the unemployment rate has doubled to 4 .4 since the bubble’s burst in
1992. This increase is unusually high for Japan. (See figure 4)
77 Crowell, Todd; “Living Beyond its Means”; Asiaweek: Hong Kong; August 30, 1996;
Page 20.
78 Thornton, Emily; “Japan's Hidden Jobless”; Businessweek: New York, NY; August 17,
1998; Page 1OO.
45
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The rising unemployment rate hindered confidence levels of
job seekers. In addition, this economic trend did not ease concerns
about the steady decrease in the job offers to applicants ratio. Once
an individual secured employment, concerns were raised as to
whether the job would support his or her future. Considering the
bubble’s burst ended the corporate tradition of lifetime employment,
worries over retirem ent became a serious issue within Japan.
Like other industrial nations, Japan m aintains a social
security program to support its elderly. However, the demand for
this government service has increased since the bubble’s burst.
People are depleting their personal savings to support themselves
until retirem ent. When retirem ent is reached, social security
becomes indispensable. This is a concern considering Japan’s social
security spending is one of the lowest in the industrialized world.79
Japan’s social security problem existed due to th e
government’s insufficient funding of this program during the bubble
era. In fact, corporations had fought to avoid paying taxes to fund
retirem ent program s.80 This resistance occurred because many
believed saving for the future was an individual concern. Society’s
belief was based on the booming bubble economy. When the bubble
burst, worries about the future caused a rise in consumer anxiety.
79 Woronoff; Page 142.
80 Woronoff; Page 145.
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Statistics indicate th a t the population of Japan’s elderly is
rising a t a quick rate. For example, the figures for 19 95 indicated
persons aged 65 or older comprised about 15 percent of the total
population. It is believed in 2 0 2 0 , Japan’s elderly will comprise
about 25 percent of the total population.81 When one compares this
percentage to actual census figures, it equals a large population. In
fact, th e current population of Japan is 130 million and rising.
W hat is a more startling factor to consumer anxiety is the
percentage of the younger population is declining. This means the
portion of the population th a t works to fund social security
program s is shrinking.82 Concerns exist as to who will support
Japan’ s senior citizens in the future. Worries such as this has only
adversely affected consumer confidence levels. Until economic
conditions rise, hopes for the future will continue to remain uneasy.
The end of the bubble economy caused a serious consequence in
changing the face of consumer society. It is true th a t the Japanese
were once envied by the industrialized world for their materialistic
values. However, the prospects of the Japanese consumer have
changed since 1992. The bubble's burst gave consumers a rude
awakening. The economy can not always guarantee prosperity.
81 Crowell, Todd; “Worried About Pensions”; Asiaweek: Hong Kong; August 30, 1996;
Page 21 _
82 Woronoff; Page 144.
47
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Figure 4: Comparison of unemployment rate and job offers
to applicants ratio (for the years 1990-1998).
Source: Japan Economic Almanac 1999
1990 1992 1994 1996 1998
■ Unemployment
□ Job offers
a
00
Conclusion
The Japanese economy of the 1 9 8 0 ’s and 1 9 9 0 ’s could best be
described as a roller coaster ride. It climbed up to an apex, and fell
back to earth with great velocity. The bubble economy was a symbol
of Japanese capitalism. During the late 19 8 0 ’s, the business world
witnessed with awe a t the boom of the bubble. Then in the early
1 9 9 0 ’s, they watched with dismay as the world’s second largest
economy tumbled. The speculative bubble economy had burst.
Japan’s economy in the post-war era was created with the
hopes of converting a m ilitaristic dictatorship into a peaceful
democracy. One purpose of the American Occupation from 1945-
1 9 5 2 was to transform Japan from a hated enemy, to an
indispensable ally. There existed concerns th at post-war Japan may
side with the Communist Soviet Union. Japan was faced with the
“second opening” by the U.S. to ensure democracy would prevail.
Ironically, alm ost a century earlier, Japan under the
governance of the Tokugawa Shogunate was faced with the first
opening of its nation in 1853. Complying with Western demands
granted wealth and power to an imperialist Japan. In similar
fashion, the second opening of Japan, allowed the island nation to
pursue its interpretation of post-war capitalism . Japan would
eventually earn the status as the world’s second richest nation.
49
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Hence, the ancestral grounds of the bubble economy were
founded. For the three decades following the end of the Occupation,
Japan’s economy grew at an astounding rate. During the 19 60’s, the
GNP grew a t a yearly percentage rate of double digit figures. Former
Japanese Prime Minister Hayato Ikeda predicted in 1 9 60 , Japan’s
GNP would double in 10 years. Ikeda died in 1965, but his economic
promise was achieved, as Japan’s GNP surpassed most of Europe.
In 1985, the bubble economy was established in Japan. The
hopes of the Plaza Accord to curtail Japan’s surplus with the United
States were a blessing in disguise. Japan’s trade advantage
continued to grow. An appreciated Yen facilitated the growth of the
bubble. The bubble grew a t an alarming rate. Finally, it reached its
maximum point in 1990, and burst in 1992. The strains of a rapid
financial expansion tested the limits of the bubble economy.
We have discovered th a t the crisis in the financial sector was
the key to the bubble’s downfall. In the afterm ath, the burst had
significantly affected two im portant elements of the economy: the
corporation and the population. Now, the question remains as to
what the government has been doing to stimulate the stagnating
economy. The bursting of the bubble did have adverse consequences.
However, Japan still has the potential to rebuild itself. It is just a
m atter of finding the most efficient means of economic revival.
50
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Financial Restructure:
In the years following the end of the bubble economy, the
Japanese Government experim ented with various policies to mend
the wounds of the financial crisis. Recently, somewhat successful
attem pts have been made a t restructuring the financial sector from
top to bottom. In December 1 998, a hardline politician named Hakuo
Yanagisawa became the head of financial restructuring.83 His policy
required banks to disclose its books, and embrace restructuring.
Yanagisawa’s stern stance may have prevented the collapse of
the banking sector. However, his push was interpreted as being too
aggressive for a weakened economy. Ironically, the man th a t saved
Japanese banks was dismissed less than a year after taking his post.
Yanagisawa apparently chose a restructuring method th a t m et with
much disapproval. Yet his policy has been the most successful.
Another government policy involved the idea of nationalizing
Japan’s banks. The Ministry of Finance developed this belief from
w hat is called the Nordic Solution.84 During the early 1 9 9 0 ’s,
Nordic countries: Finland, Norway, and Sweden suffered a comparable
banking crisis. The solution involved nationalization. However, this
plan was struck down considering the size of bad loans in Japan.
83 Bremner, Brian; “Reform with Kid Gloves”; Businessweek: New York, NY; October 18,
1999; Page 170.
84 Landers, Peter; “State Solution”; Far Eastern Economic Review: Hong Kong; October
1, 1998; Page 80.
51
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Essentially, the bad loan problem has served as an obstacle to
governm ent policies implemented to fix the banking problem. As a
result, fiscal actions have also included attem pts at simply ridding
bad loans from the books of banks. As early as the mid 19 9 0 ’s, the
Finance Ministry encouraged banks to write off bad loans from their
b o o ks.85 Japanese banks were finally allowed by governm ent to
retire any loans th a t were attached to insufficient collateral.
The attitude change in governm ent policy toward the finance
sector allowed for y e t another first in Japanese banking. Japan’s
Ministry of Finance has expressed more willingness to allow banks
to go under, or file bankruptcy.86 This is quite a change considering
bankruptcy has been a taboo in business practice. However, th e
magnitude of the banking problem has forced upon such polices.
Government policies a t correcting the financial crisis have
proved successful in some aspects, and fruitless in others.
However, one truth stands out: Japan is making an honest attem pt a t
healing the pains of the post-bubble years. In addition, to answering
th e questionable s ta te o f th e financial sector, th e Japanese
G overnm ent has also im plem ented policies a t revitalizing th e
economy using other methods. The banking overhaul was step one.
85 Murakami, Mutsuko; “How Safe is Japan?”; Asiaweek: Hong Kong; July 21, 1995;
Page 46.
86 Crowell, Todd; “Reviving the Banks”; Asiaweek: Hong Kong; May 2, 1997; Page 53.
52
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Economic Revival:
In addition to the vast overhaul of the banking sector, the
Japanese Government has implemented other measures to revive the
economy. One method materialized in the form of a government
spending package. As noted earlier, spending is a vital component in
the economic cycle. Government spending was to serve as an
economic stimulus. Basically, funneling money into the economy
was a strategy to end the recession, and then start an expansion.
Keeping this theory in mind, the government has budgeted over
3 0 0 billion Dollars for public works expenditures since 1 9 9 2 .87 The
bulk of the funding has gone to the nervous centers of business in
Japan, the urban societies. In order of rank, they are Tokyo, Osaka,
and Nagoya. The purpose of this policy was the hope government
spending would encourage the populace to spend. Corporate and
consumer spending would certainly give the economy a jump start.
Back in October 1992, former Japanese Prime Minister, Kiicht
Miyazawa declared th a t the spending package was certain to “swing”
the economy in th e right direction.88 Such bold predictions
represented the collective voice of government. Fiscal spending was
a step in the right direction to stimulate the depressed economy.
87 Tanikawa, Miki; “The Cities are Sinking”; Businessweek: New York, NY; October 1 9,
1998; Page 54.
88 Landers, Peter; “Same Old Story”; Far Eastern Economic Review: Hong Kong; January
8, 1998; Page 74.
53
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Another method o f an economic revival materialized in the
form of changes to Japan’s foreign economic policy. The years
following the bubble’s burst witnessed the Japanese Government re
evaluating the nation’s business relationships with the international
community. It was believed th at Japanese activities in crisis ridden
economies of Asia hindered Japan’s own revitalization.89 The policy
was to entice companies to withdraw its businesses from Asia.
In addition, foreign economic policy tow ard the West also
made a drastic change. Particularly, the Ministry of International
Trade and Industry (M ITI) avoided commerce issues such as free
trade with the United States.90 Discussions of such topics only
added to distract attention away from more im portant matters such
as economic revitalization. Sacrificing relations with the West was
an acceptable opportunity cost of post bubble economic revival.
Since the bubble’s burst in 1 992, the Japanese Government has
been active in its policies to jump start the recessive economy.
Although no individual can say Japan is “out of the dark”, the state
of the economy has improved. The bubble era is a historical m atter
now. Japan has been ta u g h t an important lesson. A nation can easily
rise to economic dominance, but can fall from grace more easily.
89 Bremner, Brian; “Last Cfriance for the Yen”; Businessweek: New York, NY; July 6,
1998; Page 46.
90 Bremner, Brian; “This is Going to Happen”; Businessweek: New York, NY; December 7,
1998; Page 106.
54
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Asset Metadata

Creator Okada, Peter Lee (author)

Core Title The collapse of Japan's bubble economy and its consequences

Degree Master of Arts

Degree Program East Asian Area Studies

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag Economics, Commerce-Business,history, Asia, Australia and Oceania,OAI-PMH Harvest

Language English

Contributor Digitized by ProQuest (provenance)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c16-34007

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Rights Okada, Peter Lee

Type texts

Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection)

Access Conditions The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the au...

Repository Name University of Southern California Digital Library

Repository Location USC Digital Library, University of Southern California, University Park Campus, Los Angeles, California 90089, USA