Japan Echo Web

Lessons of Japan’s Bubble Economy

Two decades have passed since Japan’s bubble began to burst in 1990, and throughout this period the economy has been in poor health. It has encountered successive financial crises, experienced price deflation for the first time since World War II, and seen the public debt mushroom, all the while limping along at a very slow growth rate. This has been a bewildering change for a nation that until then was registering spectacular growth. After all, over a period of more than 40 years after the war’s end, Japan’s economy had grown into an entity so weighty that it was even said to have become a threat to the economy of the United States.

Why did a speculative bubble with so much destructive power inflate in the second half of the 1980s, and why has the impact of its deflation lasted so long? These are questions that many economists are still trying to answer. Without doubt a variety of factors were involved. It is said that a failure in macroeconomic policy management was the cause of the bubble economy and that when the bubble burst, policymakers again bungled their response. And it is also said that there was basically nothing the government could have done to weather the nation’s first full-blown financial crisis of the postwar period. Arguments like these deserve to be carefully examined one by one, but treating all of them would take up more space than is available to me.

In the following I will instead place the changes in the Japanese economy in long-range perspective and seek to throw light on where and how, within the historical flow, a bubble inflated in the second half of the 1980s and stagnation set in starting in the 1990s. As I develop this argument, it will become evident that it is useful not just for looking at Japan but also for clarifying points in common with the problems many countries have encountered.

In 1990, when the bubble began to collapse, the baby-boom generation’s older members were reaching the age of 45. Subsequently large piles of nonperforming loans accumulated, quite a few financial institutions failed, and Japan got its first taste of price deflation in the postwar period. As the 1990s drew to a close, the baby-boomers were moving into their fifties. This was a time when the bubble’s collapse ushered in a period of falling prices, and it was also when the Japanese economy moved beyond the stage of fast growth with a youthful population. Japanese society had matured, and the assorted problems associated with an aging population and declining number of children had to be tackled. This huge shift in demographic structure was intimately related to the nation’s experience during the age of the bubble and falling prices.

Actually quite a few industrially advanced countries are going through a similar transition. Many are countries with their own baby-boom generation, and many are experiencing a declining birthrate, with the result that they also have a population growing top-heavy from the swelling ranks of senior citizens. The changes in Japan, though, have been more dramatic. The Japanese economy grew faster during the years of high-tempo growth, and the Japanese population has been aging faster since early in the 1990s, with the birthrate falling further. The speediness of the changes is reflected in the severity of the bubble and the downward trend in prices. In this light, a study of Japan’s experience during this period should yield lessons that will be of interest to people in other developed nations.