Il decennio perduto del Giappone in 16 minuti (Casual Economics)

Il decennio perduto del Giappone in 16 minuti (Casual Economics)

picture this the year is 1989 and you’re living in Japan your country managed to fully rebuild after World War II has grown its economy size ninefold in 33 years and even created Mario Brothers things are booming 32 of the 50 largest companies are Japanese and Japan is now the second largest economy in the world what could go wrong let’s rewind and see exactly how we got here the year is 1945 and World War II has just ended japan has surrendered but faced devastating blows with a fourth of its structures destroyed 82% of its ships gone their colonies seized and is now under the power of an American-led Allied occupation force headed by General MacArthur under his leadership they introduced major reforms to turn the country peaceful including complete demilitarization downgrading Japan’s emperor to a figurehead role renouncing war under a new constitution and establishing a new democratic government the Allied occupation force also believed the large industrial groups known as Zibatu had supported Japanese aggression so they would enact reforms aimed at eliminating them they introduced the anti- monopoly act to maintain competition in the country and required the shares owned by these zibatu be sold off they also gave workers the right to organize in unions increasing the percentage of unionized workers from 3.2% in 1945 to 53% in 1948 and for land reforms 38% of Japan’s agricultural land was purchased under a government reform program and resold at low prices to the workers working them while these reforms removed Japan’s non-democratic powers they did not address the country’s economic problems of runaway inflation and low productive capacity resulting in food shortages with the rise of the Cold War the US shifted its aim to making Japan a success story of capitalism in Asia and a strategic asset to fighting communism in 1949 the Dodge Plan was introduced to fix Japan’s economic problems by cutting price subsidies in order to reduce government spending achieve a balanced government budget and lessen the printing of money japan’s exchange rate was also fixed at$1 US to 360 yen as a way to promote exports the Dodge Plan succeeded in getting Japan’s inflation back under control and opening up the country to international trade it wasn’t until the early 1950s when war broke out in Korea that Japan’s economic growth resumed the war made Japan an outpost for US and UN forces and created a sudden surge in demand for Japanese manufactured goods as a small country lacking natural resources Japan relied on investment industrialization and exports to grow rapidly in the 1950s and60s in 1960 Japan’s Prime Minister Hayato Aeda set a goal to double the national income in 10 years and managed to do it in only 7 years from 1950 to 1973 by rapidly industrializing Japan experienced extraordinary growth averaging around 10% annually in what became known as Japan’s post-war economic miracle when a country is undergoing this transformation human capital or education is very important so that workers can move from low productive sectors into high productive ones and in 1960 Japan’s secondary school enrollment rate was even higher than the 1965 average across other industrialized economies this period of rapid postwar economic growth came to an end in 1973 with the oil crisis japan imported 99% of its energy resources and when the oil crisis hit there was widespread panic that there would be blackouts and shortages in the country with oil prices soaring the cost of production for Japanese companies increased which in turn triggered inflation to reach 24.9% in 1974 while Japan was eventually able to diversify the countries where it got its energy from and build up its oil inventory investors realized Japan’s energy vulnerability which caused a downward shift in their expectations of future growth and by this time Japan had mostly caught up to the US and Western countries in terms of technological progress the oil crisis a decrease in investment and slowdown in technological progress caused growth in Japan to drop from 10% to 5% after 1973 even with lower levels of growth Japan had become the second largest economy in the world and moving into the 1980s it would see a property boom the concept of land ownership held a special place for the Japanese given it was a feudal society not too long ago and also a mountainous country where development was difficult from 1956 to 1986 land prices went up 5,000% only going down in one year banks were fine to provide loans against land with the myth of ever rising land prices in Japan alongside this property boom Japanese companies began to dominate with Sony Honda Nintendo Canon and many more rising into large global players with more Japanese products there was a growing fear that Japan was taking over the United States in Detroit angry auto workers destroyed Japanese cars in protest against them in 1985 US Treasury Secretary James Baker held a meeting with the world’s leading economic powers at the Plaza Hotel in New York they agreed to lower the US dollar relative to other currencies including the yen while this increased the purchasing power of the yen relative to the dollar it also made Japanese exports nearly twice as expensive which risked sending Japan into a recession to prevent a recession and boost the economy in 1986 the Bank of Japan decided to hold a low interest rate policy making it cheap to borrow money and this money flowed into the land and stock markets the interest rate used to lend to commercial banks was brought to a record low of 2.5% in February 1987 the prolonged low interest rates and lacks regulation ultimately contributed to the formation of an asset bubble throughout the post-war period the Bank of Japan also followed a practice known as window guidance where they would directly tell banks how much they could lend and to which industries or companies in the mid 1980s the Bank of Japan relaxed their window guidance and encouraged banks to lend more banks began to lend more aggressively even if it meant to higher risk borrowers also at this time companies could add to their profits by trading securities and stocks without paying any capital gains this became known as zitec brokerages in Japan offered token funds where they offered guaranteed returns over interest rates using special speculative accounts called egg tokens in 1985 9 trillion yen was invested in these token tokens and four years later it had risen to as much as 40 trillion yen or $300 billion from 1985 to 1989 real estate prices rose four-fold and from 1985 to 1987 asset prices had doubled as stock prices went up businesses speculation profits soared over half the profits of big players like Toyota and Nissan was now from speculation and not from actual business few cared that ordinary operating profits had actually declined in this period on top of this speculation in the stock market the property boom was in full effect and people began to put the two together people began to calculate each company’s land holdings and deemed the companies were cheap when including the value of the property that they owned which in their mind were seen as hidden assets as more companies were valued based on their land holdings and as banks increased their property lending this only further led to rising share prices and rising share prices in turn increased the value of the bank’s cross shareholding which inflated their capital enabling them to lend out more this circular process created a fatal flaw and a large bubble in Japan’s economy even with the 1987 stock market crash Japan had recovered best making many people believe the government would hold up stock prices and there was no way they could go down in April 1988 the abolition of taxexempt postal savings accounts released 300 trillion yen or $2.2 trillion for new investment by that same year Japan had expanded its economy by over nine times from its 1955 size while the US economy had only grown by 2.67 times to Japan they had revived their self-confidence after the humiliation of the war many economists and policymakers were praising Japan’s economy for its excellent performance however with land prices skyrocketing for young people the average lifetime earnings were no longer enough to buy even a small apartment in central Tokyo so people were forced to take out multigenerational 100-year mortgages land prices had reached levels so high that the land of Tokyo’s Imperial Palace was estimated to be worth more than all of the real estate in the state of California plans were even made to build an underground city in Tokyo faced with a large trade surplus Japanese companies were spending lavishly on massive purchases in America in 1989 Sony purchased Colombia Pictures and Mitsubushi bought a majority stake in the Rockefeller Center that only further increased American hysteria of Japan buying up the United States with a strong yen currency and new riches in Japan from the bubble profits the art market saw one of its hottest buying sprees japanese collectors spent $8.7 billion on world-renowned paintings from the likes of Van Go Renoir and Monet in Japan golf had also become a significant game played by a third of businessmen and Tokyo’s exclusive Pogan Country Club membership reached prices of 400 million yen or 2.7 million the total value of golf memberships in Japan was estimated to have reached an astonishing $200 billion in December 1989 the Nikai index would reach a peak of 38,915 and Namora Securities boldly predicted it would reach 80,000 by 1995 however Japanese stocks had already increased three times faster than corporate earnings even when including unsustainable speculative profits in company earnings things were about to take a dramatic turn nearing the end of 1989 Yasushi Mo was appointed as the new governor of the Bank of Japan and he set out with the goal to prick the bubble on Christmas Day he ordered the Bank of Japan raise interest rates and the Nikai would reach its peak just a few days later unlike other crashes like 1929 Japan’s crash did not happen overnight but instead the bubble gradually deflated the Bank of Japan raised interest rates five times until it reached 6% in August 1990 and this tight monetary policy alongside declining investor confidence and the existing overleveraging ultimately put an end to the stock market and land price bubbles by 1992 the Nikai had dropped 60% from its peak and within a few years Tokyo property prices had fallen 60% while the bubble was unsustainable and needed to be popped people lost a lot of money from the crash and stopped spending money which sent Japan into a recession facing this recession Japan’s government enacted aggressive macroeconomic policies to boost demand by increasing government spending to fund public works and construction and also by having the central bank lower interest rates to make it cheaper to borrow money with this it seemed Japan was recovering from the recession when in 1997 something else would emerge a banking crisis after the bubble popped many corporations could no longer pay back their loans to banks instead of forcing them to pay many banks decided to give these big companies breaks either by lowering the interest rates or forgiving part of the loans these loans that were unlikely to get paid back became known as zombie loans and there were hundreds of billions of dollars worth of them in a normal competitive environment these unprofitable companies would shut down but with the help of the banks they were allowed to survive with zombie loans making up large portions of a bank’s assets this put some banks in serious jeopardy and ultimately led to the first big bank Hokaido Takushoko failing in 1997 the government ultimately had to step in to rescue some banks from collapse it would take 6 years to a decade for all the zombie loans to be eliminated from banks balance sheets in a painful process but the crisis was finally over during the two lost decades Japan’s economy grew 0.8% per year on average in real terms compared to the US Japan lagged behind in the adoption of information technology as well as investment in the growing digital industry japan went from one of the fastest growing countries to one of the slowest and this slow growth went on for two decades japan’s labor market was also known for being famously rigid where it was hard to hire or fire people the term mandogi wazoku was coined for people who sit by the windows without working and have instead been sidelined by their company facing poor economic conditions and with Japanese companies offering their employees lifetime employment this meant less job opportunities for the young workforce less innovation and would create a lost generation some of these young people withdrew from society and became shutins refusing to leave their parents’ homes enter the workforce or socially interact with the outside world while Japan had entered decades of stagnation the four Asian tigers Hong Kong Singapore Taiwan and South Korea had followed Japan’s early economic success in industrializing and were now leading to strong competition for the country in 1998 people and companies were spending so little money prices began to fall and Japan experienced a deflationary spiral usually to counter this countries print money and lower interest rates to make money cheaper and encourage spending but Japan had been already doing this for years driving interest rates down to almost 0% in 1998 yet people were still not spending prices were dropping and the economy was stalling japan was in a liquidity trap where monetary policy had become ineffective as interest rates were at 0% and people still were not spending with forward guidance a practice uncommon for central banks at the time the Bank of Japan said they would keep interest rates at 0% until the economy improved japan also became the first country to use a method called quantitative easing with quantitative easing the central bank would go around to banks and purchase the bank’s money tied up in bonds or other assets for cash in doing so the banks could go lend out this new cash and spread it into the economy the impacts of QE in Japan for fighting deflation and stimulating growth were seen as modest and are still debated when the US’s recession hit in 2007 they learned from Japan and the US passed a $700 billion bailout for the banks cut interest rates to zero and when that was not enough introduced forward guidance and quantitative easing if they had not learned from Japan’s painful example it may have been much worse when a market gets overinflated it can be hard to spot a bubble until after it bursts japan’s story shows just how devastating a bubble can be today Japan faces a new set of supply side problems japan’s rapidly aging population continues to cause strain on the country’s social and economic systems and economists are now grappling with if Japan’s economy can continue to grow when faced with a shrinking population and there you have it the story of Japan’s lost decades comment down below your thoughts and if you enjoyed this video be sure to subscribe to our channel for more economic videos just like this

In this video we uncover the economic history of how Japan grew into the second largest economy in the world. Following the war, Japan’s economy experienced extraordinary growth in what became known as Japan’s post-war economic miracle. This led to the country becoming the second largest economy in the world and going into the 1980s it experienced a property and stock market boom. Following this boom, the country would enter a bust period of stagnation, slow growth which became known as Japan’s Lost Decade. Watch the video as we uncover this incredible story.

#japan #economics

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Source Notes:
-Takatoshi Ito and Takeo Hoshi, The Japanese Economy, Second Edition Book.
-Edward Chancellor, Devil Take the Hindmost: A History of Financial Speculation.
-Chart data sources include: The Federal Reserve Bank of St. Louis, Bank Of Japan, and IMF.

As a small country lacking natural resources, Japan relied on investment-led industrialization and exports to grow rapidly in the 1950s and 60s. In 1960, Japan’s Prime Minister Hayato Ikeda set a goal to double the national income in ten years and managed to do it in only seven years. From 1950 to 1973 by rapidly industrializing and modernizing the country to catch up to other Western countries, Japan experienced extraordinary growth. Averaging around 10% annually in what became known as Japan’s post-war economic miracle.

Following the oil crisis and even with lower levels of economic growth, Japan had become the 2nd largest economy in the world and moving into the 1980s, it would see a property boom. From 1956 to 1986, land prices went up 5000%, only going down in one year. Banks were fine to provide loans against land with the myth of ever-rising land prices in Japan.

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