A) The Japanese State

Excessive financial deregulation in response to the Plaza Accord (1985)

- stock prices increased by 160% from 1985-1989
- land prices more than doubled
- huge buildup of money
- Bank of Japan also tolerated excessive loans
(1980-1989: Total loans by Japanese banks increased by 120% but loans to compani
es increased by more than 700%)
Fiscal mismanagement:
-> Poor regulation
- Japan implemented stringent tariffs and policies to encourage people to save
- loans and credits became easier to obtain --> facilitated growth but created t
he conditions for speculation to rise
- did little to tighten bank lending rules or the problem of the keiretsu
- postal savings system enjoyed a comparative advantage over private banks becau
se it did not have to pay any corporate taxes or deposit insurance premiums
-> Slow responses
- BOJ aware that asset prices might be growing at an excessive rate, but did not
do anything.
- kept interest rates low
- adopted loose monetary policy (allowed baburu to grow)
- Bank's failure to act was a "major mistake"
LT problem with the Japanese growth model:
-> Japan's growth model based on aggressive export growth via protectionism
- MITI refused to introduce trade liberalization measures when pressured by the
WTO and the US
- prevented competition within Japan and kept domestic prices artificially infla
ted
Result: huge build-up of money which fuelled the asset price baburu
Corruption:
- Lavish govt spending
- Amukadari (ties between private sector and state, prevents economic reforms)
Govt ultimately responsible for creating the Lost Decade as it allowed the babur
u to be inflated
- LDP government which had governed Japan for so long can be given biggest share
of the blame
Also, the excessive tightening of monetary policy in response to overblown Babur
u exacerbated the impact of its bursting
- BOJ immediately raised i/r
- led to steep drop in stock prices (1990: Nikkei fell 38% and wiped out 300 tri
llion yen in value)
Ineffective responses to economic collapse sustained the downturn:
-> Low interest rates + increasing money
- led to liquidity trap
- policy ineffective because there was limited demand for funds
- reforms finally attempted in 1998, but was too late to have any major impact
Misdirected policies dashed hopes of growth:
- premature contractionary FP
- misdirected govt spending in projects of doubtful worth

- agriculture protected and inefficient

B) Japanese banks
By 1990: Japanese banks were among the biggest in the world
Banks lent freely -> pushed up land and share prices
Banks allowed the use of property/shares as collateral to borrow to purchase eve
n more property and shares
-> further pushed up prices
1980-1989: total loans increased by 120% BUT loans to companies increased by 700
%
Banks never expected borrowers to repay loans
- loans routinely rolled over + banks made no distinction between safe and risky
borrowers
- led to low rates of return
Lack of pressure led corporations to invest in unprofitable projects
(Nippon Steel invested in flower shops to provide work for redundant employees)
C) Rigidities of Japanese businesses:
- Japanese corporate system led to inefficiency as companies were plagued by exc
ess capacity, over-employement and debt overhang
- cartels formed under MITI's initiative reinforced inefficiency
(bigger firms often pressured to cut production)
D) Outdated, ineffective keiretsu:
- each member firm developed unbreakable dependency on keiretsu
- System propped up efficiency (banks lending to inefficient companies)
- takeovers and restructuring by other firms not possible due to locking of stoc
k in keiretsu members
E) The International Economy:
Revaluation of the Japanese yen under the Plaza Accord arguably set the baburu i
nto motion
- higher yen coupled with 30 years of growth doubled the purchasing power of the
Japanese and made them even wealthier, paving the way to the overheating of the
baburu
Loss of traditional US economic support
- US began taking tougher stance against Japanese trading issues
- Exacerbated trading tensions (US sought to remove protectionistic policies)
Emergence of competitiors: China/Taiwan/South Korea
- cheaper, more efficient competitors in areas of traditional Japanese dominance
F) Weak domestic demand
- loss of confidence slashed demand
- exacerbated by Japanese preference to hold on to savings instead of spending
Conclusion:
-> bursting of baburu explained timing of lost decade
-> what ultimately perpetuated Japan's poor growth and subpar economic performan
ce was the underlying structural factors of misguided govt intervention, ineffic
iencies in Japanese businesses, as well as the emergence of new competitors from
SK/T/C
-> Japanese state's failure to intervene and subsequent misguided intervention b
ears the largest share of responsibility of the Lost Decade
- only in 1993 that the govt admitted that it was facing economic difficulties