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.

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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 reason
why the size of loan was so large is probably that both the bank and the
investor were behind the land speculation activity (banking scandal). Investors
were paying some key money (sort of a bribe) to financial institution in order
to obtain a larger size loan. Therefore many financial institutions were over
loan during this period. Another form of raising cash flow for the speculate
market was by braking down a loan that obtain from a large financial institution
to a specific enterprise,


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