The Economic Crisis We Learned Nothing From

The Economic Crisis We Learned Nothing From

On the 29th of December 1989, the Nikki, Japan’s 
primary stock index, closed at a record high of 38,915. After accounting for inflation, it would 
never again reach this level. At this time, Japan was quickly becoming the preeeminent 
economic force in the world. Its highly innovative companies were churning out world-class 
technology. Investors were doubling or even tripling their money every other year. And all 
of this was creating some of the highest incomes anywhere on the planet. But even during these good 
times, there were problems bubbling away under the surface. A long period of easy money and low 
interest rates grew a roster of underperforming and inefficient businesses. Speculation ran 
rampant as people were expecting the technology of the day to continue dominating into the future. 
Companies and households loaded up on debt. Market returns and loose lending standards like 50-year 
mortgages fueled a real estate bubble that made innovation centers like Tokyo and Kyoto some of 
the most expensive places on the planet. All of these vulnerabilities were then tested by a 
radical shakeup in global trade relations, an aging population, and oh no, I’ve done it again. 
You’re all going to start to think I am mixing up these tapes just to make some kind of statement. 
Let’s just uh There we go. Japan never recovered from the crash that followed. For the past 35 
years, the country has stagnated by almost every conceivable metric. Its innovation is lackluster. 
Incomes haven’t budged, and the real estate that caused all of these problems. Some of those 
homes are now worth just 1% of what they were during what are now known as the bubble years. 
So, you might be thinking, “Hang on, a lot of these economic warnings sound very familiar today. 
I know where this is going.” This is going to be another video talking about how we haven’t learned 
anything from history. Right? Wrong. Japan’s lost decades may have been the crisis we refused to 
learn from. But there are some big differences between then and now that almost render this 
comparison completely irrelevant. The only problem is those big differences probably aren’t in our 
favor. The Bank of Japan pursued an expansionary monetary policy which led to a speculative boom 
in real estate and equities which gave rise to fierce competition in the banking sector which 
in turn fueled reckless lending practices. Jensen Invidia is making a hundred billion investment in 
OpenAI. The real estate in Tokyo was so expensive that people were taking out 100year home loans. 
East PaloAlto was once a pocket of affordability, a place where you didn’t need tech money or 
even two incomes to live comfortably and raise a family. With more than 19 million people crammed 
into the greater metropolitan area, Tokyo is not only one of the most densely populated cities in 
the world, but one of the priciest real estate markets anywhere. When Japan surrendered in 
1945, most of the country wasn’t just damaged, it was unusable. Factories were turned into 
rubble. Farmland was scorched. Ports were in ruin and destruction wasn’t limited to a few industrial 
centers. The Allied bombing campaign had effectively dismantled the economic backbone of 
the nation. Four in five ships were gone. 1/3 of all industrial machinery had been destroyed along 
with a quarter of all trains and cars. Of course, two cities in particular are remembered in the 
history books. But in the grand scheme of Japan’s devastation towards the end of the war, they 
were barely a rounding error. 64 additional major cities were destroyed by firebombs, leaving almost 
half of all urban areas completely useless. Tokyo lost 65% of all its homes. Osaka lost 57% and 
Nagoya, the country’s third largest city, had lost 89% of habitable dwellings and infrastructure. 
By the end of the war, five of the 7 million residents of Tokyo had left the ruined city. 
In total, around 2.75 million Japanese citizens had died during the war, and almost 9 million were 
left homeless afterwards. This was not the kind of destruction someone bounces back from. You don’t 
lose most of your houses, your shipping fleet, your factories, and millions of people, and simply 
just rebuild through willpower. Japan’s survival required massive outside intervention. And the 
only country with a plan to rebuild it was the same country whose previous plan had been to level 
it. Now, the United States didn’t rebuild Japan because it felt guilty. It rebuilt the country 
because it found it to be incredibly useful. The next battle America set its sight on was fighting 
communism. And to understand why Japan suddenly became the most valuable piece of real estate 
in this battle, you only have to look at what was happening across Asia in 1945. Immediately 
after Japan’s surrender, the Soviet Union was quick to act on the broken empire, carving out 
enormous influence in Manuria and northern Korea, territory that Japan held claim to for over 
a decade. Stalin wasted no time filling the vacuum Japanese forces left behind. In China, 
the Communist Party under Maoadong controlled large rural territories and was gaining momentum 
in the Chinese Civil War. A war that would end with China becoming a communist state by 1949. 
Other Asian countries such as Indonesia, Malaysia, Thailand, Burma, the Philippines, and Vietnam 
all saw communist factions gain prominence. From Washington’s perspective, if Japan was lost 
to communism, the consequences would have been enormous. Yes, Japan itself had been destroyed. 
But while their industrial capacity was gone, its industrial potential was not. They still 
had one of the highest skilled, most technical workforces in the world. A destroyed factory 
can be rebuilt, but a skilled workforce is much harder to replace. Japan’s ports, shipyards, 
and urban infrastructure were ruins, but they were strategically placed ruins on the doorstep 
of the Pacific. Washington understood that if Japan ever recovered, it would once again become 
the most advanced manufacturing center in Asia, which meant Japan was simply too important for the 
US to abandon and too dangerous to lose. And so, the United States began one of the most ambitious 
nation building projects it had ever undertaken. The Supreme Commander for the Allied powers, 
effectively an American military government with the Allied partners kept in the loop just enough 
to say it was a collective effort, took control of Japan following the terms of surrender. The 
operation was led by General Douglas MacArthur, who was given sweeping authority to reshape 
Japan. He oversaw Japan’s new constitution, expanded political freedoms, and introduced new 
civil liberties. He did however introduce the Civil Censorship Departments, an organization 
dedicated to restricting Japanese media, and crucially to suppress information about the 
human cost of the atomic bombings. I suppose it’s easy to grant civil liberties when you’re the one 
deciding what people are allowed to know. Anyway, there were changes introduced to reshape the 
Japanese economy as well. As cold war priorities took shape, Washington shifted from punishing 
Japan to rebuilding it as quickly as possible, the Allies pushed to dissolve the Zybatsu, a 
family-owned monopoly, into many different firms called Keretsu with many different shareholders. 
Land reform broke apart the huge landlord estates, creating millions of small landowning farmers and 
injecting income into rural Japan. Labor reforms legalized unions, strengthened worker protections, 
and helped shape the cooperative corporate culture that would later define Japanese industry. Tax 
reforms were introduced to dilute concentrated wealth and encourage corporate reinvestment over 
financial hoarding. The United States also rebuilt Japan’s financial system from the ground up, 
stabilizing the Bank of Japan and allowing American banks to operate inside Japan. Modern 
industrial policy began taking shape as well. MacArthur encouraged targeted investment in 
sectors like steel, ship building, chemical and machinery, industries that would eventually 
fuel Japan’s exportdriven boom. At the same time, the US shipped in food, fuel, medical supplies, 
and raw materials, preventing famine and giving Japan the breathing room it needed to rebuild. All 
of this laid the groundwork. But the true turning point came in 1950 when the Korean War erupted and 
transformed Japan from a recovering nation into the industrial engine of the United Nations war 
effort. When the Korean War erupted in 1950, the recovering Japan unfortunately found itself in the 
center of the most important geopolitical crisis in the early cold war. And although Japan never 
sent any troops, it became the primary logistical hub for the entire United Nations war effort. The 
United States guaranteed Japan security through the 1951 US Japan security treaty, which allowed 
American bases and the proverbial American nuclear umbrella to anchor Japan’s economic revival. 
American ships were repaired in Japanese shipyards. American aircraft were serviced in 
Japanese hangers, and American purchase orders poured into Japanese factories at a scale no 
one had predicted. This influx of military demand reignited industries that had been idle 
since 1945. America needed factories to produce its military equipment, and Japan was a perfect 
manufacturing hub for its weapons in the Pacific. Major firms like Mitsubishi, Sumi-tomo, and Mitsui 
were revived by enormous US procurement orders for everything from ships and pharmaceuticals to 
oil, uniforms, and beer. By 1953, these special procurement payments amounted to $800 million a 
year, equaling 27% of Japan’s total export trade. Japan’s economy was roaring again with the economy 
growing 10% per year and manufacturers that had been making goods for the US military started 
importing other goods back into the US. By the mid 1960s, Japan had moved far beyond recovery. 
It was now one of the fastest growing economies on the planet. Factories that had once supplied 
American forces in Korea were now exporting to the entire world. Japanese radios, cameras, ships, 
cars, and steel were becoming global benchmarks for quality. And this success reignited a national 
confidence in Japan that this growth would be sustained forever. Growth wasn’t just expected. 
It was assumed, baked into corporate plans, household budgets, and government policy. Japan’s 
technology firms were at the cutting edge. Sony, Panasonic, and Sharp were churning out worldclass 
electronics that reshaped global consumer markets. From the Walkman in people’s pockets to 
stereos in living rooms around the world, investors and households convinced themselves 
that Japan’s technological rise was permanent. The idea that growth could go on forever became 
so normal that it stopped feeling like optimism and started feeling like geometry. Green line 
goes up and to the right. Now, it’s easy to see how ridiculous this is in hindsight, but how 
many of you have a retirement plan that you’re quietly assuming will return 10% every year for 
the next 40 years? Anyways, for ordinary people, the best way to own a piece of the miracle was 
to own a piece of Japan itself. So, real estate prices surged far beyond anything connected to 
local wages. Large cities like Tokyo, Asaka, and Kyoto became some of the most expensive places 
on the planet. Not because there was no more land, but because everyone believed land prices would 
never fall. Luxury consumption exploded. European fashion houses became household names, and 
expensive watches, handbags, and designer clothing turned into normal status symbols. Japan 
developed one of the largest secondhand luxury markets in the world, which goes to show how many 
people could afford to buy in the first place. The banking system amplified all of this. Japanese 
banks were flush with deposits from the country’s massive trade surplus, and cheap lending became 
normal. Loans flowed to households, corporations, and speculative property developers with almost 
no restraint. If you wanted to build it, buy it, or flip it, there was a bank ready to help you do 
it. When the first signs of trouble appeared after the Plaza Accord in 1985, which we will discuss 
soon, the government of Japan didn’t slow things down. They doubled down, terrified of throttling 
growth and losing their dominant position in the global economy. Interest rates were cut even 
lower. Loans were given out faster. Asset prices went higher. And every policy decision was 
designed to fuel the fire that everyone could see, but nobody wanted to extinguish. Between 1985 and 
1989, the decay more than tripled. In 4 years, stock valuations detached from underlying profits. 
But as long as the index number on the evening news kept climbing, nobody really cared to ask 
questions. Now, if things are starting to sound a bit familiar, there are some differences that I 
should point out. Workers were paid pretty well, job benefits were strong, and social cohesion was 
high. The top 1% didn’t have nearly the wealth that they do here in the United States today, and 
ordinary households felt like participants in the economic miracle. Households were also very 
good at saving. Families had cash buffers in bank accounts. Their system was not built on maxed 
out credit cards and financing Door Dash orders. If a bubble burst, households had cushions. 
Businesses had reserves. To the outside world, it looked like Japan had found an entirely new 
economic model. A model that combined technology, stability, high savings, and a formula that looks 
like infinite prosperity. American executives were flying to Tokyo to study management techniques. 
Economists wrote bestsellers predicting Japan would overtake the United States by the early 
2000s. Japan is often held up by economists and historians as a cautionary tale of where we 
might one day end up if we are not too careful. But there is the argument that if we look under 
the surface just a little bit, we are already there. And in fact, we may have been there for 
years at this point without even realizing it. So, it’s time to learn how history works to find 
out if Japan’s economic crash would even be that bad by today’s standards. Today’s episode is 
sponsored by Brilliant. Brilliant is a powerful learning platform built around the idea that 
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everything on Brilliant. The turning point in Japan’s miracle came in 1985 when leaders from 
the United States, Japan, West Germany, France, and the United Kingdom gathered at the Plaza 
Hotel in New York and signed what became known as the Plaza Accord. The agreement was designed 
to push the Japanese yen higher and the US dollar lower. The United States had started to become 
frustrated with its ballooning trade deficit, and Japanese exports were a major political 
target. Strengthening the yen was the diplomatic way to ease that pressure without launching 
a trade war. A stronger yen meant Japanese products would cost more in the United States and 
American products would cost less in Japan. This effectively meant that Japan was making it harder 
on themselves to export. So why the would they do this to themselves? Well, for Japan, signing 
the agreement maintained good relations with the US and was a responsible power in a system 
the US dominated. 30% of all exports from Japan were purchased by the United States, their largest 
buyer at the time. The problem for Japan, though, was that their economy relied heavily on exporting 
highquality manufactured goods, and a stronger yen made those exports more expensive internationally. 
This shift placed an immediate strain on Japan’s industries. But despite the pressure, the 
economy kept chugging along. A more valuable yen increased Japan’s purchasing power abroad, making 
overseas travel, asset purchases, and investments more accessible. Japanese firms began purchasing 
highprofile properties around the world. Japanese policy makers were reluctant to let this momentum 
fade, so they responded to export challenges by lowering interest rates and expanding credit. 
Their goal was to support domestic demand while exporters adjusted. This created an environment 
of extremely cheap money. Banks increased lending. Developers expanded projects and corporations 
took advantage of readily available credit. Years of optimism were now paired with unusually 
loose financial conditions. Real estate values accelerated far beyond income levels, and some 
parcels of land in Tokyo reached valuations that were more symbolic than economic. The numbers no 
longer reflected a future expected return. They reflected an expectation of endless appreciation. 
Their stock market followed the same pattern. Between 1985 and 1989, the NK rose to levels that 
had no meaningful connection to company earnings or growth. Prices were driven by liquidity, 
confidence, and momentum. By the late 1980s, speculation had become the defining feature of the 
Japanese economy. It was visible in property, in stocks, in corporate borrowing, and in household 
expectations. Japanese policymakers started to get concerned by this irrational exuberance. 
And the central bank decided to shift course and raise interest rates. Their goal was to cool 
the most overheated parts of the economy. However, just a slight uptick in interest rates was all it 
took to expose the vulnerabilities that ran far deeper than anyone cared to acknowledge. Property 
developers struggled to service loans. Corporate expansion plans stalled and projects that only 
worked under low interest rates no longer made financial sense. Asset prices began declining. 
Land values fell sharply and the decay started to fall from its peak. In some regions, real 
estate prices collapsed by 70 to 90% over the following years. The bubble had finally burst, 
but it was the aftermath that would define the next several decades. Japan had entered a 
period of deflation. Prices were falling, wages remain stagnant, and earnings expectations 
kept declining. For what it’s worth, these conditions are very rare in advanced 
economies and are extremely hard to reverse. Deflation discouraged investment in the Japanese 
economy. Prices and revenue were likely to fall. Businesses delayed expansion plans, postponed 
hiring, and avoided taking risks. Households had postponed major purchases, reducing demand even 
further. The banking sector deteriorated under the weight of bad loans accumulated during the bubble 
years. Many borrowers couldn’t repay their debts, but banks avoided writing them off, which 
weakened the financial system for years. Policymakers attempted various forms of 
stimulus and reform, but responses were cautious and incremental. None of the measures 
were aggressive enough to break the deflationary cycle. Japan remained stable on the surface. There 
was no sovereign debt crisis, no hyperinflation, and no political collapse. But the country was 
stuck in a prolonged period of stagnant growth that became known as the lost decades. Economic 
activity fell into a long low frequency drift. Living standards plateaued, consumptions remained 
weak, and the optimism that defined the boom years never fully returned. By now, you might be 
thinking, “Okay, so this is where we’re going to hear about how we’re basically going to become 
Japan.” And yes, but also not really. Because one important thing to remember here is that Japan’s 
lost decades happened under conditions that were in many ways far more stable and forgiving than 
what we have today. Japan ran into deflation, a world where prices fell gradually over 
time. Sure, this is bad if you own a home and a mortgage and your salary decreases, but 
I don’t even need to go into why that’s not an issue for us. That is bad for growth and terrible 
for investment. But at least people aren’t waking up to find that rent, food, and energy are 
15% more expensive than they were a year ago. Our problem today is inflation where the price 
of almost everything essentially has jumped and wages haven’t kept up. Tariffs don’t help with 
that because a tariff is a tax on imported goods which gets pushed into higher costs for businesses 
and then higher prices for consumers. Typically, a 2% inflation rate is considered healthy because it 
encourages people to spend and invest today and it makes existing debt slowly easier to pay off over 
time. But once inflation stays above that range, it stops being healthy and starts being I can’t 
afford to live anymore. And when that happens, people do what people always do when the cost of 
living outruns their income. They finance the gap. Japan has one of the strongest household saving 
cultures in the world. Even during the asset bubble, families still put aside significant cash. 
When the bubble popped, they lost paper wealth, but they still had actual money. In America, we 
took the borrowing part from the Japanese story, but completely forgot the savings part. 
Households carry record levels of debt and have almost nothing in reserve for emergencies. 
Even food is now being financed through buy now, pay later services like Clana. Japan entered its 
stagnation with balance sheets that could survive decades of low growth. We are entering ours with 
balance sheets that can barely survive a month. Inequality is another major difference. Japan’s 
wealth distribution is far flatter than almost any other developed economy. During the boom, 
the gains actually reached ordinary workers. People didn’t feel locked out of prosperity. In 
fact, they very much felt included in it. When the bubble burst, the pain spread across a broad 
middle, not concentrated among people who already had the least. In highly unequal societies, 
the same stagnation became a social pressure cooker. Economic problems turn into political 
ones very quickly. Corporate culture played a stabilizing role as well. In Japan, layoffs are 
never a go-to solution for struggling economies. Firing an employee is seen as a last resort, not 
a clever way to appease shareholders. In America, layoffs are the first lever companies will 
pull. If a stagnation hits this system, the pain spreads directly into the labor market 
and then the political system. Japan also had a far more equitable wealth system. They have heavy 
inheritance taxes. So, as wealth transfers between generations, a meaningful portion is reinvested 
back into the economy instead of hoarded in asset values. This slows the creation of permanent 
dynasties and keeps inequality from getting worse. In countries where inheritance taxes are weak, 
politically untouchable, or easy to avoid, wealth compounds upwards and stays there. Over decades, 
that creates economic pressure points Japan didn’t face. And then there’s the public infrastructure. 
Japan used its boom years to build systems that actually function well. reliable public transport, 
accessible health care, and social services that don’t collapse under mild stress. When growth 
slowed, those systems remained in place. People could still get to work. They could still see 
a doctor. They still had institutions they could depend on. If you run a similar stagnation 
through countries where the trains barely run, hospitals are overloaded, and basic administration 
is held together with duct tape, the outcome looks very different. And finally, there’s something 
Japan never had to worry about. The global demand for the US dollar. For decades, the American 
consumer has been effectively subsidized by the rest of the world because everyone needs dollars 
and US assets to trade, borrow, and store wealth. That foreign demand allows the US to run enormous 
trade deficits without collapsing its currency. In practical terms, it means the US can import 
far more than it produces because everyone else is willing to hold the IUS. If that demand ever 
weakens, the subsidy ends and Americans suddenly pay the cost of what they actually consume. 
So yeah, when people warn that we don’t want to become Japan, what they usually mean is we 
don’t want slow growth. But Japan went through slow growth with high savings, low inequality, 
employment stability, and functioning public systems. It wasn’t ideal, but it was survivable. 
If something similar hit America today, we’d be facing it with record debt, low savings, high 
inequality, fragile public systems, and political institutions that struggle with normal years, let 
alone a lost decade. Japan had guard rails while we’ve been quietly removing ours for years. Which 
leads to the uncomfortable conclusion. Japan’s lost decades, the scenario everyone treats as 
a nightmare, might actually have been a soft landing. And if that was the soft landing, what 
does the hard landing look like? Japan made major investments into public transport, healthcare, 
and social services, guardrails that the US simply does not have today. If something similar happened 
in America, the fallout would look very different. Now, is a Japan style stagnation guaranteed? Maybe 
not. We’ve gotten very good at avoiding economic crisis, or at least delaying them. But the more 
we avoid small downturns, the more pressure we build into the system. And when you suppress every 
tiny burn, the whole forest saves its anger for one giant meltdown. If you want to see how we got 
to a world where recessions barely happen and why that might actually be making everything worse, go 
watch our video on how we forgotten how to have a healthy recession. And don’t forget to like and 
subscribe to keep on learning how history works.

To learn for free on Brilliant, go to http://www.brilliant.org/howhistoryworks. Brilliant’s also given our viewers 20% off an annual Premium subscription, which gives you unlimited daily access to everything on Brilliant.

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On the 29th of December 1989 the Nikkei (Japan’s primary stock index) closed at a record high of 38,915…
(After accounting for inflation) it would never again reach this level…
At this time, Japan was quickly becoming the preeminent economic force in the world.
Its highly innovative companies were churning out world class technology, investors were doubling (or even tripling their money) every other year, and all of this was creating some of the highest incomes anywhere on the planet.
But! Even during these good times there were problems bubbling away under the surface.
A long period of easy money and low interest rates grew a roster of underperforming and inefficient businesses,
speculation ran rampant as people were expecting the technology of the day to continue dominating into the future,
Companies and households loaded up on debt,
Market returns and loose lending standards like 50 year mortgages fueled a real estate bubble that made innovation centers like Tokyo and Kyoto some the most expensive places on the planet
all of these vulnerabilities were then tested by a radical shakeup in global trade relations, an aging population and… oh no… i’ve done it again… you’re all going to start to think I am mixing up these tapes just to make some kind of statement… lets just… there we go…
Japan never recovered from the crash that followed.
For the past 35 years the country has stagnated by almost every conceivable metric, its innovation is lacklustre, incomes haven’t budged, and the real estate that caused all of these problems?
Some of those homes are now worth just ONE PERCENT of what they were during (what are now known) as the bubble years.
So you might be thinking… hang on… a lot of these economic warnings sound very familiar today… I know where this is going… This is going to be another video talking about how we haven’t learned anything from history right?
Wrong…
“Japan’s lost decades” may have been the crisis we refused to learn from, BUT there are some big big differences between then and now that almost render this comparison completely irrelevant…
The only problem is, those big differences… probably aren’t in our favour…