how did the bubble economy in japan pop?

Question

does anybody know the reason why there was suddenly a deflation in japan in the 1990s (still continuing today) and why their economic 'boom' suddenly stopped?

oh..and what are bad loans? what did the banks do with those bad loans?

Answer 1

In 1984 the US was suffering from a huge trade imbalance and they forced/strongarmed the yen to revalue and the dolar to weaken to rescue the U.S's battered industrial base.

As Japans economy was strongly export based, this created a huge loss of production and income.

To overcome this sudden loss of income and jobs, the central bank cut interest rates, and encouraged the banking system to loan (print) lots of money.

Huge rises in asset prices then beget more rises, with no signs of inflation, and the bank only moved upwards in tiny steps for a long time. An asset lending bubble spiralled out of control. Rationally went out of the window.

In 1987 The US decided that the dollar has weakened far enough, and it reversed, gaining back some of its value. Higher real interest rates rollocked the worlds markets, and a recession followed.

In Japan what was called a balance sheet recession followed. This means that the banking system suddenly had a lot of bank debts, which had been spent on worthless junk which was valued as giving a real productive return.

These easy money/idioticy inspired balances gave no return and the debts against them could not be serviced.

With ever lower valued assets, many in the corporate and banking world were naturally focused on paying down the huge nonsense free money loans taken against them, to prevent from going bankrupt.

Productive capacity and investment projects shrank as firms tried to repair thier balance sheets. This created a credit deflation.

To solve this, Japan printed lots of money/injected lots of money into the economy through spending, raising the nominal income of firms, and bailing out the carrying cost of these debts by eroding thier true worth in relation to the money supply.

The reason the bubble popped was because the prices of assets were so high the slightest rise in real interest rates from the central bank would stop the mad expansion and firms had to reverse course, stop expanding, and cut back, sell assets, and have to pay off the mad loan amounts with real money.

The Japanese asset bubble reached insane heights! In 1991 The land under Tokyo’s Imperial Palace was valued at more than all the land in Florida.

Answer 2

It was a number of things that all came to a head about the end of 1990. Their stock market and real estate had both become outrageously overpriced and were in a precarious bubble. There was a network of unsound loans, banks were more apt to loan as favors or due to kairetsu relationships than do prudent due diligence, and government oversight only encouraged the bad practices.

The stock market bubble fed the problem, because a lot of corporations and banks owned stocks of other companies and real estate on their own balance sheets -- and in Japanese accounting they were allowed to claim the current values of those assets as book value, rather than the original purchase price (as Americans would do), and this in turn made their balance sheets look far more healthy than the actually were when those assets got wildly overpriced -- which in turn enabled them to take on more loans etc.

Not sure but I think the trigger for the meltdown was related to the Iraq invasion of Kuwait or the resulting 1st Gulf War and the resulting rise in oil prices. Once the stock market started melting down everything came down like a house of cards and the banking system became dysfunctional.

Answer 3

they were close to deflating, but there was no prolonged period of deflation.

deflation causes the economy to enter a stand-still, cause prices for whatever you want to buy today will be better tomorrow.

They did however have to adopt a policy of 0% overnight interest rates in order to encourage borrowing funds, to stimulate the economy.

The problem was that too many companies were financed by loans from banks which they never repaid. Then once some companies started defaulting- everyone started defaulting. The economy declined and the banks were in a crisis.