Japan’s Financial Crisis

Abstract

Whether Japan’s bubble was a bubble in the sense that is was driven by pure speculation, or only in the sense that agents had unrealistic expectations about future growth prospects, the legacy of the bubble is the same. After asset prices began to tumble after 1989, the negative wealth effects of the crash had major economic consequences. Households as equity and landholders bore massive realized and unrealized capital losses. For those who bought land at the peak, average prices had fallen by 40 per cent on average between 1989 and 1993. Equity prices fell by half from the all-time high of nearly 40,000 in 1989 to just under 15,000 at one point in 1995. Indeed, these losses, realized or otherwise, caused households and businesses alike to retrench, sending the Japanese economy into its deepest and most prolonged slowdown. As this cyclical slowdown resulting from such wealth effects coincided with major structural changes inherent in an industrial economy at Japan’s stage of maturity, the adjustments have been particularly severe. The recession was not, as Chalmers Johnson (Atlantic Monthly, 1993) has suggested, the invention of Japanophiles seeking to give Japan breathing space in trade negotiations with the US, but a very serious period of adjustment.