Welcome to Konichi-Value
Japan's Bubble Burst: The party that wasn't supposed to end This is a detailed depiction of Japan's lost
decade which started in 1991 and ended in 2001 To get a full depth of the biggest
economics collapse in history I have relied on several sources Mainly I've taken the liberty to take
excerpts, translate and restructure my favorite parts of Katsuhide Kageyama's
amazing book "Redoing Economic History" I've also added parts from the book
"Princes of the Yen" by Richard Werner Lastly, I've included multiple reputable
sources such as Deutsche Welle and Nikkei Asia This is the most thorough project
I have ever embarked on this blog and I'm happy that it is finally finished So, without further ado, enjoy The story of Japan's last decade Part 1: 1991 till
1994: The party that wasn't supposed to end Japan was on its way to surpass the United
States as the world's largest economy and the supply of infinite growth and
prosperity seemed non-stop Then the party suddenly stopped... The common knowledge is that the
Japanese economic bubble burst in 1991 This is true as the decline
in land prices began that year In fact, already at the end of 1989 Japanese
stock prices continue to fall at an alarming rate The stock market bubble had burst
and everyone should have had a premonition that Japan's future was in danger However, it wasn't until the beginning of 1993 that most Japanese people realized
that the economy was in deep trouble Why this discrepancy? An important lesson for any future recession
is that it is natural for there to be a gap between the decline in the economy
and the realization of a recession Just because real estate and stocks weren't
doing well didn't mean that companies would instantly fail Even if they couldn't
borrow money from the big Banks they still managed to secure capital from
investors and less risk averse Banks However, as the economic situation gradually became worse profits declined and
sources of money started to shrivel up It just took a few years for them to catch up to reality The Japanese Bubble Burst Through
the Eyes of Katsuhide Kagyama This part is a collection of translated excerpts
from the book "Redoing Economic History" by Kagyama I was still a student in the early 90s
life was great I went out drinking almost every day wasting money on women gambling and putting
anything I had left into all kinds of Investments Everything was going up and it felt like every
Yen I spent was going to double next year Our brains had been so thoroughly poisoned by
the bubble of the past few years that we were all insanely optimistic most of us didn't even
consider that the prosperity could ever come to an end That's why neither I nor anyone
around me could make normal risk judgments I thought "If stock prices have fallen
why not recover it by purchasing land" This is the same thinking as a compulsive gambler "I lost that Pachinko so let's
get it back with Majong" The difference was that a whole nation was thinking like this This idea is depicted perfectly in
Kaiji, a Japanese manga depicting the minds of obsessive gamblers which the
Netflix series Squid Games is based on Getting a job went from a given to a luxury Around 1993, we were keenly aware of
the arrival of a full-scale recession due to the physical signs of bursting of all
assets in the Japanese economy That year was the year I graduated and started job hunting
Before graduating I've been complaining that I didn't want to be a Company employee but I knew
it was time to grow up and pay tribute to society I waited for the mountains of job postings
to arrive like they had had every year before but they didn't come did I miss something had
I not been informed that personal departments around Japan have started new ways of recruiting
although I felt a bit uneasy I went to the nearest bookstore and bought a job information magazine I
sent my resume to three companies that I thought I would get an offer from within days after a
while I received a reply from all three companies When I saw the reply I could not believe it Although they had different expressions,
they contain the same contents: "Due to various circumstances, we have decided
not to hire new graduates this year" What do they mean? The bubble had already burst and the newspapers
and TV had been saying this for a long time, but this is the first time I felt it This year I failed to find a job and became
a freelance lecturer at a cram school I remember that that it felt so humiliating For my whole life I've been taught that
full-time corporate employment was the only form of respectable occupation and that anything
less was only for good for nothing Deadbeats at the same time the world around me began to
flood with news about corporate bankruptcies arrests of bankers and scandals
at Securities Companies Perhaps even more humiliating for me was that
there was an unprecedented rice shortage that year and most Japanese people were forced
to eat Thai rice even though it was considered vastly inferior to Japanese
rice What a humbling year it was... end of excerpt The Japanese government steps in Shortly after the burst of the bubble the Japanese government announced that they will
Implement emergency economic measures They offered the most Orthodox fiscal policy
possible, issuing new government bonds and using them as financial resources to reduce income
taxes and carry out public work projects If this was a normal recession his policy
would have gradually recovered the economy However, this was no ordinary recession This was the biggest bubble in
history that had just collapsed What needed to be done was not only
to create demand through stimulus but to clean up Japan's financial sector
which was the root cause of the bubble Even though the government was able
to spur people's consumption to some extent by scattering money, as the
banks and Securities Companies were not functioning properly the flow of
money just reformed into new bubbles After some time of ever increasing government
stimulus nothing had really changed All that was left for the people was a recession
with no end in sight and a huge financial deficit due to the issuance of deficit covering government
bonds Japanese banks had billions in collateral Why was it not collected? One of many factors that greatly delayed the post-bubble economic recovery was the amount
of non-performing loans Japanese Banks held Non-performing loans are loans
that have become uncollectible In other words, the lender
is insolvent and usually in the stage of legal bankruptcy
liquidation AKA a bankrupt borrower What was so weird in this situation was
that no asset of the lender were retrievable After all, banks take
collateral when lending money In most cases a business loan is
structured something like this: We will lend you 50 million yen but in return
we will take your factory as collateral when you go bankrupt or die we will own
the factory and not lose money However at the time of the bubble excessive lending was
rampant in Japanese Banks in anticipation of a future rising land prices most banks started
lending more money than the borrower's current collateral value and brokers would work together
with Bankers to write fake requests for approval So when the bubble burst and banks came to
collect, all that was left of the insolvent companies were the junk real estate with a
much lower value than the money they lent Moreover, now that the bubble had burst the value
of the real estate was dropping even further However, banks turn a blind eye to
this problem even after the burst of the bubble and kept the loans at their
inflated value on their balance sheets This is because many of the bankers
held these nasty loans personally In some banks practically all employees held
these nasty loans from the bubble period so if the bad loans were acknowledged Not only would the bank implode but all its
employees would also go bankrupt However as the bursting of the
bubble became bigger the true state of the banks was revealed and the
bad loans increased at an alarming rate In other words Japanese Banks only
had massive collateral on paper In reality it was only junk as a result Banks were forced to write
off bad loans and suffer huge losses This led to vicious cycle where the
bank's capital base was eroded and they were unable to lend leading to a
further decline in the Japanese economy Part 2: 1995 to 1997 - Everything gets even worse The government started bailing
out banks with tax money In 1995, Yusen, a collection of Japan's largest
financial institutions specializing in Residential Mortgages went bankrupt With backing from The
Trusted agricultural cooperatives or JA as they're known in Japan Yusen was believed to have
no financial problems until the bubble collapsed Surprisingly the government decided
to inject 685 billion yen of public tax funds into the already bankrupt Yusen.
This caused a severe backlash from the public Yusen's bailout was incredibly suspicious the first reason the bailout was so
suspicious was Yusen's government connection Six of the eight presidents in Yusen were
former bureaucrats of the Ministry of Finance Then there were the unnatural regulations The Minister of Finance was
legally obliged to publicly report the total volume of real estate loans However they created a disclosure exceptions
for loans to residential housing and agricultural Cooperative financial institutions The main holdings of Yusen Furthermore, the Minister of Finance and
the Ministry of Agriculture forestry and fishery or MAFF as they're also called,
had secretly exchanged a memorandum of understanding to bail out JA in the event of a
bankruptcy in exchange for investing in Yusen This information was made
public in the 1996 Yusen diet In other words, Yusen was completely controlled by the bureaucrats at the Ministry of
Finance to promote their interests On top of that, its assets were connected
to MAFF, JA and the Liberal Democratic Party LDP, the ruling party in Japanese government for
almost the entirety of Japan's post-war history Hence, despite the extreme backlash from the
public to bailout Yusen with tax money it was in the government's absolute best interest to do
so and just like that the horrific practice of bailing out financial institutions with public
funds was established in Japanese government The Kobe earthquake and the
start of the Yen appreciation On January 17, 1995 Japan was hit by the great
KhanShin Awaji earthquake or the Kobe earthquake it lasted for over 20 seconds
and was among the strongest, deadliest and costliest to ever strike Japan It measured seven on the GMA seismic
intensity scale and killed 6434 people Japanese insurance companies started to
frantically sell all their foreign currency assets to buy yen in preparation for paying
the insurance claims that were flooding their offices after the earthquake. To make matters
worse domestic consumption for foreign goods and services was at an all-time low while
Japanese goods were still demanded abroad This caused an increase in demand
for the Yen among foreigners since the yen is needed to buy Japanese Goods Multiple
other factors exacerbated their appreciations Measures taken by the United States to
reduce the trade deficit with Japan, the devaluation of the Yuan as a
preferential treatment for China the evacuation of foreign money to the
Yen stemming from the Mexican currency crisis and in general speculative purchases
of the yen to benefit from the appreciation created The Perfect Storm for the currency
The appreciation progressed at a rapid pace In 1990 the Yen began to appreciate
around 150 Yen to the dollar but by early 1995 it was 100 yen to the
dollar and then 90 Yen and then 80 yen On April 19 1995 the exchange rate finally hit
its all-time high of 79 Yen to the US dollar The bank of Japan, BOJ, steps in Japan was already in a state of economic despair many started to see the writing on the wall if the
Yen continues to appreciate Japanese exports would no longer be profitable and further bankruptcies
would ensue to combat the appreciation the bank of Japan or BOJ lowered its official interest
rate to 0.5 percent with the BOJ lowering its official interest rate to 0.5 percent Japan
had the lowest interest rate in history This low rate is significant when
considering that one of the main triggers for the Japanese Financial bubble was that the boj
lowered its interest rates to 2.5 percent in 1986. When that rate was announced
Japanese Banks increased their borrowing and lending at an insane pace
claiming that it was too cheap to ignore Now if the post bubble rate
was only one-fifth of that doesn't that mean a much larger bubble could form? Not at all... With the scars still not healed
from the bursting of the bubble, Japanese Banks frantically
turned away incoming customers Out of every increase in fear Banks
refused to lend money to their customers as they saw them as potential sources of bad
debt Bank started seeing all incoming customers as nothing more than bad debt risk and their main
goal became to prevent any further risk even at the cost of zero growth instead they sentenced
small and medium-sized enterprises to death by taking away their working capital on
the grounds that they had broken collateral The phrase "Banks lend umbrellas when it's sunny and take them when it rains" was often
used to explain how the Japanese Banks were acting at the time Part three: 1997 to 1999 - Reality
catches up to the Japanese government The fiscal law that destroyed Japan's recovery In 1997, despite the ongoing recession
the Japanese government implemented a retroactive policy called "The
fiscal structure reform law" It was simply put a law that said
"We know we are in a recession but we are still going to
take more money from you" The government had implemented several emergency
economic measures to deal with the post bubble recession, but when they proved ineffective and
only increased the amount of depth they panicked Therefore the ruling cabinet at the time,
the Hashimoto cabinet, tried to restore the soundness of the physical structure even
though it would impose a burden to the public The consumption tax was raised from
three percent to five percent and medical expenses were increased and all
special income tax cuts were canceled That year the budget deficit
still increased by a trillion yen At the end of 1997, the economic
situation was already very fragile but to make matters worse the Asian currency
crisis occurred as a result loans all over Asia became non-performing loans. The Japanese economy
went into an even deeper recession and the public discontent led to the defeat of the Hashimoto
cabinet in the 1998 House of council's election Bad Japanese Banks finally collapsed
and pessimism became the norm In 1997 to 98, major financial institutions went
bankrupt in a chain reaction in November 1997 Hokkaido's largest bank Hokkaido takushoku bank,
or Takugin for short, went bankrupt In comparison to the start of the bursting of the bubble this
news did not Shock the Japanese public they had already been rehabilitated to expect the worst
and pessimism had become the standard outlook Just one week after Takagin's
bankruptcy Yamaichi Securities, a massive Securities trading firm,
voluntarily closed down. Yamaichi was one of the four main Securities Companies
in Japan along with Nomura, Daiwa and Nikko The LTCB collapse exposed the
corruption of the Japanese government In 1998 the long-term credit bank of
Japan or LTCB for short went bankrupt It was established in 1952 and was the
biggest long-term credit bank in Japan In fact, in 1990 it was the
ninth largest bank in the world The main purpose of the bank was to
support capital investment funds for post-war reconstruction efforts However,
LTCB struggled during the bubble period as the numbers of customers decreased Therefore
LTCB like other Banks decided to invest in more bubble-like directions I.E land and stocks
instead of industrial Finance to secure customers As a result LTCB had loaned to
insolvent customers and leasing companies and subsequently went
bankrupt after the bubble burst However, LTCB's bankruptcy was different. Even
though the company was already bankrupt it did not collapse It was if someone was keeping
it alive on life support like a zombie Who was keeping LTCB alive> LTCB was a bank created by Hayato Ikeda, former
prime minister of Japan, and had very deep connections with LDP's Kokenkai or conservative
faction or rather it acted like Kokinkai's wallets Since LTCB mainly focused on Industrial Finance
it was the Prime lender to General Contractors and since the general contractors are the LDP's
source of vitality or voting and donations the failure of LTCB would be bad for the LDP in other
words the LDP desperately wanted to protect LTCB It's bankruptcy would also be bad for the LDP
because it played a role in policy-based finance by lending to the Japanese Oil Corporation
and Tokyo Electric Power Company or TEPCO In the end the prime minister at the time
of LTCB's bankruptcy, Keizo Obuchi was personally engaged in searching for potential
buyers for the bank but was not successful As a last ditch effort Kichi Miyazawa, chairman
of the financial reconstruction commission, adopted a policy of firmly protecting
LTCB until a receiver was found During its reconstruction many
people were arrested for fraudulent accounting and fraud but they were
all acquitted by the Supreme Courts in addition two long-term Bank Executives who
were involved in the cover-up committed suicide Part four: The end of the Lost decade After more than 10 years and the collapse of
many of Japan's most rotten institutions, the country's economy finally returned to a
pattern of moderate but steady expansion After a series of cabinet reshufflings and many
corruption cases coming to light, some structural reforms were finally being implemented such
as deregulations and a liberalization of the Japanese economy which have helped improved
efficiency and competitiveness in the country A perhaps more crucial factor to Japan's recovery was actually the recovery of other major
economies such as the United States and China which has helped improve global economic
conditions and boost demand for Japanese exports However Japan never truly recovered from the Lost
decade as new and more systematic issues arose One of the biggest threats to Japan's economic
recovery is its declining population and aging society, which is already leading to a shortage
of labor and a reduction in domestic demand In addition, Japanese institutions never really
recovered from their pessimistic and hawkish view of the economy. Japanese banks are still reluctant
to borrow to anything but large enterprises and Japanese companies have become hostile to
implementing new reforms and new technologies Presently, Japan is the least
productive country in the G7 Furthermore, despite the implementation
of structure reform and expansionary monetary and fiscal policies there
are still many questions about the underlying health of Japan's economy and
its ability to sustain long-term growth While the end of the lost
decade may bring some relief it is clear that Japan still has a long road
ahead to ensure a bright and prosperous future Thank you so much for listening,
thank you Victor Adossi for the idea, and thank you all for giving me the time
and courage to finally finish this podcast Yours sincerely Rei Saito
