The Bubble Economy Of Japan

The Bubble Economy of Japan


 The Economy of Japan had experience a tremendous growth since the end of the

Korean war. The growth of GNP in 1967 and 1968 was above 10 % (double digit

growth period) which exceed countries such as Britain, France and Germany. The

economy experienced a boost is due to many reasons, such as: enlargement of

industrial facilities, massive adaptation of western technology and education,

lower the military expense to 1% of GNP, relation with power nation, human

resources and their spirit to achieve "zero defect program". But after the first

and second oil crisis that occur from 1973 onward. The economy move downwards

partially due to the poor management of economic policy. Although the government

had attempt to adjust the economic policy but the recovery was slow. As the

soaring of yen continues the demand for export has increase tremendously.  With

the concern of the United State of this problem, president Reagan and the G5

have signed an agreement with Japan called "Plaza Agreement" , the agreement

stated that the exchange rate of Japan and Deutschmark can appreciate against

the U.S. .  Since then the yen value began to appreciate, Japan was going

through a period of trade balance adjustment. While Japan is prepare to go

through a period of trade balance adjustment, it will also suffer a period of

recession, so the government strongly encourage business activities to

strengthen the economy in order to prevent backwash effect.  It was this event

which boost up the GNP and raise the exchange rate.  With this exchange rate

advantage it stimulate business activity on housing and stock investment which

created a bubble economy.  During this period almost the entire country was

involve in land speculation or other speculate activities.  In this essay it

will prove that land speculative activities had create many negative impacts to

the Japanese society and economy.  Firstly, it will describe the cause of land

speculation. Secondly it will discuss on the society and political effects in

Japan and lastly it will focus on the economy effects, more over it will include

the aftermath when the bubble collapse.


 The root of this bubble economy is due the wave of land speculation.  The wide

spread of land speculation activities were mainly because it is profitable.  The

speculative transactions in assets grew and grew and many believe that this will

last for very long period of time. One of the reason that leads to  massive

investment in the risky activities is because of the success of the Japanese in

the international market during 70*s - 80*s.  Many Japanese enterprises and

business man had become very wealthy.  These people have a large sum of equity

to invest.  Some of these people have focus on risky asset such as stocks and

land, therefore many of the regular ventures were left behind.  One of the major

cause of the massive transaction in the land market was due the incremental of

loans by banks. Financial institution was very positive in lending money to the

enterprise.  This enhance the accessibility to the land speculate market. Each

size of this loan is very large.  This is because the size of mortgage in Japan

financial institutions are based on the collateral, (house) while in North

America the size of the mortgage is based on the borrower*s income stream.

Therefore the size of loan can be obtain by borrower is larger in Japan than

North America. Also 62% of Japanese households own the home that they live and

in average the value is near 4 million yen. Therefore there are lots of

potential investors.  And during the period of speculative activities, borrowers

increase the value of their loans as the value of their collateral increases.

Since asset is highly liquidate, the number of potential speculators are high

and borrowers in Japan were able to get a larger size loan on real estate

therefore speculative activities sink into the level of common home owner and

large enterprise. Beside the method of calculating mortgage size, another 
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