Many global economic crises are often overlooked without an appropriate analysis. The current economic downturn might just be considered minor. On the other hand, significantly impactful economic events continue to be extensively researched. Reflecting on recent global economic crises, including the Nixon Shock, the 1973 oil crisis, the Japanese real estate bubble, the dot-com bubble, the subprime mortgage crisis, the European PIIGS crisis (Greek debt crisis), and the COVID-19 pandemic, these incidents have been meticulously scrutinized. Among these crises, the aftermath of Japan's real estate bubble, in particular, continues to exert influence, forming the basis for many fiscal policies worldwide. As someone interested in the field of economics, despite numerous scholars having studied these events, I would also like to provide a brief overview of the situation in Japan from the Japanese perspective.
After the Second World War, Japan began to rise as one of the major global powerhouses in the 1970s. From the 1970s, Japan truly started dominating the world market with its astonishing technological prowess. While the oil crisis reverberated throughout the global automotive industry, the crisis served Japanese car manufacturers with an opportunity to showcase their technical superiority. Japanese cars were known for their reliability, affordability, and impressive fuel efficiency. In the 1980s, Japan's electronic products achieved significant success in the international market. Japan's white goods and semiconductors led the global market with complete control. Sony's Walkman, making its mark in the world mass market, became an iconic symbol of Japanese electronic expertise. Furthermore, Japan captivated the world with its unique cultural products, including anime and artisanal spirits.
Amidst a global economic struggle, it was impossible to let Japan thrive on its own for the U.S. and other superpowers. In the United States, anti-Japanese sentiments were on the rise, and the U.S. government faced massive criticism. As a result, the United States rallied advanced countries to mount robust restrictions against Japan. The key components of these restrictions included the adjustment of the yen's currency value and regulation of Japan's market share in the semiconductor industry. Predicting how Japan would be affected by these decisions at the time was challenging, and even years later, the impact on Japan remained uncertain. During that period, the book "The Japan That Can Say No" (to America) - by Morita and Ishihara became a bestseller. It went beyond advocating for an equal relationship with the United States, emphasizing the superiority of Japan, its people, and its companies. Japanese people at the time took pride not only in the economic aspects but also in a strong sense of cultural heritage and history.
The first blow Japan faced after the Plaza Accord in 1985 was a currency adjustment. At the time, the Japanese yen was approximately 230 yen per US dollar. Due to the United States sharply increasing interest rates to curb inflation, the yen's exchange rate rose significantly. The Plaza Accord involved governments worldwide massively purchasing yen to increase the price of Japanese products by appreciating the yen. As demand for the yen surged globally, its exchange rate plummeted to around 150 yen per US dollar almost instantaneously. Throughout this process, the globally distributed Japanese yen became recognized as one of the safest currencies in the world. In exchange for making Japan's currency a safe asset, Japan lost competitiveness in the prices of its domestic products. Consequently, prices of overseas products within Japan were drastically reduced, almost halving their original prices.
The issue was that Japan responded differently than initially expected to this setback. Instead of causing a setback, it actually boosted Japan's confidence and prevented them from taking the originally planned countermeasures. In other words, Japan failed to respond adequately to the exchange rate changes. After the currency adjustment, the export volume of Japanese products, which had doubled in price, did not decrease as significantly as anticipated. Instead, the products became considered high-end, and people worldwide continued to purchase Japanese goods. Within Japan, foreign products were somewhat disregarded as relatively inferior. Only a few luxury items experienced an increase in imports as their prices were halved. During that time, prominent luxury brands like Gucci and Louis Vuitton were so loyal to Japan that they even created a separate Tokyo Collection. With the sudden rise in the value of the yen altering the trade environment, the Japanese government actively eased the yen supply to stimulate the domestic market. However, the domestic market did not expand significantly, and the displaced funds flowed into the real estate market.
Another blow was an abnormal semiconductor agreement that inordinately restricted Japan's market share. This agreement not only aimed to increase the prices of Japanese semiconductors but also, due to U.S. government intervention, limited their sales quantity. At the time, Japan's semiconductor manufacturing technology was overpowering America. Even though U.S. companies produced and sold similar semiconductors, they couldn't catch up with the net incomes of Japanese companies. Furthermore, Japan spared no investment in R&D to expand technological capabilities. The United States opted for a strategy to diversify the supply chain, choosing to foster growth with South Korea and Taiwan, countries with relatively lower labor costs and similar work ethics to Japan. With the U.S. providing technology and market access, coupled with the aggressive strategies of South Korea and Taiwan, Japan suffered losses to the extent that maintaining its market position became challenging.
The root cause of Japan's bubble, on a broad scale, lies in its failure to effectively respond to these two setbacks—the exchange rate and the semiconductor agreement. While there are specific reasons for each, I believe it was their excessive confidence that ultimately led to their downfall. Exploring where this confidence originated is quite straightforward. From a global perspective, the sudden doubling of Japanese individuals' wealth due to the appreciation of the yen's value was unprecedented. The number of wealthy Japanese individuals was unparalleled worldwide. They consistently opted for the very best in their choices. Moreover, Japan's pride in its manufacturing prowess left no room for imitation. Despite efforts by countries like South Korea and Taiwan to catch up, Japan at the time couldn't fathom anyone surpassing their technological capabilities that outpaced America.
Here, I'll only write about how the bubble formed in Japan, focusing on how the circumstances led to a situation where they could develop overconfidence. I do not intend to write only about the good times. Instead, I want to depict the process where misjudgments create a breeding ground for misguided confidence.
Lastly, I’d like to talk a bit more about the bubble society. The bubble society is dreadful. The real estate bubble wreaked havoc on Japan's public sentiment. Soaring property prices turned Japan into a country where even a lifetime of hard work couldn't afford you a house – a place where, despite your efforts, you might end up living in a cramped space resembling a chicken coop. Getting a job at a major corporation might offer some improvement, but without significant skills or a college education, becoming a yakuza seemed like the best path to success. The hopes of the younger generation gradually diminished. Japan was becoming a country where the yakuza thrived. Public officials couldn't accumulate wealth without corruption. To make matters worse, the Recruit scandal allowed the public to see Japan as a country where corruption openly prevailed.
To recover from this bubble and reclaim the nation, Japan exerted considerable efforts. Now, 30 years after the bubble, it is quite intriguing to see what kind of country Japan will create in the future. Japan has undergone an economic system transition, and generational changes have occurred in many aspects. However, the tough life during the bubble era has led them into an aging society, and the world has grown larger unprecedentedly with the diversification of the global supply chain. China has surpassed Japan in GDP, and it seems that Korea will surpass Japan in GDP per capita within a year. Nevertheless, Japan is a resilient nation with a population of over 100 million. I believe these people won't just stand by and watch themselves fall behind. I'm genuinely curious about what lies ahead for Japan.
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