The Bubble Economy of JapanThe Economy of Japan had experience a tremendous growth since the end of theKorean war. The growth of GNP in 1967 and 1968 was above 10 % (double digitgrowth period) which exceed countries such as Britain, France and Germany. Theeconomy experienced a boost is due to many reasons, such as: enlargement ofindustrial facilities, massive adaptation of western technology and education,lower the military expense to 1% of GNP, relation with power nation, humanresources and their spirit to achieve “zero defect program”. But after the firstand second oil crisis that occur from 1973 onward.
The economy move downwardspartially due to the poor management of economic policy. Although the governmenthad attempt to adjust the economic policy but the recovery was slow. As thesoaring of yen continues the demand for export has increase tremendously. Withthe concern of the United State of this problem, president Reagan and the G5have signed an agreement with Japan called “Plaza Agreement” , the agreementstated that the exchange rate of Japan and Deutschmark can appreciate againstthe U.
S. . Since then the yen value began to appreciate, Japan was goingthrough a period of trade balance adjustment. While Japan is prepare to gothrough a period of trade balance adjustment, it will also suffer a period ofrecession, so the government strongly encourage business activities tostrengthen the economy in order to prevent backwash effect.
It was this eventwhich boost up the GNP and raise the exchange rate. With this exchange rateadvantage it stimulate business activity on housing and stock investment whichcreated a bubble economy. During this period almost the entire country wasinvolve in land speculation or other speculate activities. In this essay itwill prove that land speculative activities had create many negative impacts tothe Japanese society and economy. Firstly, it will describe the cause of landspeculation. Secondly it will discuss on the society and political effects inJapan and lastly it will focus on the economy effects, more over it will includethe aftermath when the bubble collapse.The root of this bubble economy is due the wave of land speculation.
The widespread of land speculation activities were mainly because it is profitable. Thespeculative transactions in assets grew and grew and many believe that this willlast for very long period of time. One of the reason that leads to massiveinvestment in the risky activities is because of the success of the Japanese inthe international market during 70*s – 80*s. Many Japanese enterprises andbusiness man had become very wealthy. These people have a large sum of equityto invest. Some of these people have focus on risky asset such as stocks andland, therefore many of the regular ventures were left behind.
One of the majorcause of the massive transaction in the land market was due the incremental ofloans by banks. Financial institution was very positive in lending money to theenterprise. This enhance the accessibility to the land speculate market. Eachsize of this loan is very large. This is because the size of mortgage in Japanfinancial institutions are based on the collateral, (house) while in NorthAmerica 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 thanNorth America. Also 62% of Japanese households own the home that they live andin average the value is near 4 million yen.
Therefore there are lots ofpotential investors. And during the period of speculative activities, borrowersincrease the value of their loans as the value of their collateral increases.Since asset is highly liquidate, the number of potential speculators are highand borrowers in Japan were able to get a larger size loan on real estatetherefore speculative activities sink into the level of common home owner andlarge enterprise. Beside the method of calculating mortgage size, another reasonwhy the size of loan was so large is probably that both the bank and theinvestor were behind the land speculation activity (banking scandal). Investorswere paying some key money (sort of a bribe) to financial institution in orderto obtain a larger size loan.
Therefore many financial institutions were overloan during this period. Another form of raising cash flow for the speculatemarket was by braking down a loan that obtain from a large financial institutionto a specific enterprise,