Throughout the 1970s, Japan's economy in size was second only to the United States. After a mild slump in the mid-1980s the economy boomed again, and in 1990 it ranked first among the major industrial powers in per capita GDP. Credit was easily available and interest rates low.
Something unsound began taking place in the latter half of the 1980s. It has been described as "over-investment." It could be called, "irrational exuberance," in other words, too much enthusiasm and optimism in the pursuit of money. A "bubble" was being created while credit was easily available, interest rates were low and borrowing massive. Speculation created real estate prices that were extremely over-valued. Japan's stock market index, the Nikkei, reached a dizzying height of 37,189 in January, 1990, up from 10,000 in 1984.
From its height in January 1990 the Nikkei that month plunged, signaling that some were aware of the over investment. By July 1992 the Nikkei was down around 16,000 – a 57 percent fall. It was to be a tough decade financially and a decade of economic decline for the Japanese. During the period of over-investment, bankers, as human and as dumb as others, had overestimated growth. Seeking bigger monetary gains, they had made bad and increasingly risky loans. The result was a banking crisis in the 1990s.
The 1990s became know as Japan's "Lost Decade." Investments were increasingly directed out of the country, and the slowing investments in technology at home cut into Japan's manufacturing and competitive edge.
There was a lot of government investment in infrastructure, bridges, airports and roads. The 1995 Kobe earthquake, which killed thousands, stimulated more spending. But unemployment continued to hover around 5 percent officially – unofficially maybe around 10 percent.
Consumers remained little interested in spending other than for their essentials. They preferred to save, and with the public creating little demand, prices fell – a deflationary spiral downward. Japan's Central Bank set interest rates at approximately zero. But public interest in spending remained low.
The banking crisis festered, and in late 1997 came numerous bank failures that produced a crisis in lending. Companies had massive debts and an inability to obtain loans for capital investment. The government injected 1.8 trillion yen into Japan’s main banks to keep banking going. But the injections failed to stem the growing crisis. Banks were hiding the extent of their real losses and "bad assets." A government bail-out took hold in 1999. Many banks were unsustainable, and a wave of bank consolidations took place – to produce what would eventually be only four national banks in Japan.
The economy moved along, averaging 1.7 percent growth in the 1990s. Japan's economy as measured by per capita GDP had been greater than that of the United States in 1989 by 108 percent; in 2003 Japan's per capita GDP was only 88 percent as large as that of the United States. The value of stocks represented on the Nikkei exchange stayed down and hit bottom in April 2003 at 7,831, a drop of almost 80 percent in value from its January 1990 high. Government debt as a percentage of GDP had a steady increase from around 70 percent at the beginning of the 1990s to around 170 percent by 2003.
A business writer for the New York Times, Hiroko Tabuchi, has written:
Only in 2003 did the [Japanese] government finally take the actions that helped lead to a recovery: forcing major banks to submit to merciless audits and declare bad debts; spending two trillion yen to effectively nationalize a major bank, wiping out its shareholders; and allowing weaker banks to fail. (NYT Feb 12, 2009)
Also from 2003, Japan was benefiting from more sales to the United States and China. Japan's currency had weakened relative to other currencies which helped revive its sales abroad, helping to create what would be called a recovery. Then came the international financial crisis in late 2007. Japan in 2008 returned to recession. Government debt reached 192 percent in 2009. Japan's per capita GDP for that year was down to just a little over 70 percent that of the United States. And going into 2010 the Nikkei stock average was hovering down around the 10,000 level, a little more than one-forth what it had been in January 1990.
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