Japan's Bubble — Frenzy and Collapse

In the previous episode, we witnessed the Black Monday of 1987 and the wave of financial liberalization. Markets had become linked by computers and were beginning to move in concert across borders. Yet the place where that fervor swelled to an unprecedented scale was neither America nor Europe. It was an island nation in the Far East: Japan.

In the latter half of the 1980s, Japanese land and stocks soared to heights so extreme that everyone seemed to have lost their senses. The price of land in Tokyo could buy all of America — such words were spoken, half in earnest, in those years. What this episode depicts is the structure of that frenzy, and the price of its collapse. Not to condemn anyone, but to look closely at how far human beings and markets can swell, and where they tear apart.

The excess surplus created by a strong yen

The story begins in New York in September 1985. At the Plaza Hotel, the monetary authorities of five nations (G5) — Japan, the United States, the United Kingdom, West Germany, and France — gathered and agreed on coordinated action to correct an excessively strong dollar. This was the so-called Plaza Accord.

The effect of the agreement was tremendous. The yen rose rapidly, and Japan’s export-dependent economy was said to have been struck by an ‘endaka recession’ brought on by the strong yen. In response, the Bank of Japan sharply lowered interest rates and embarked on monetary easing of unprecedented scale. Low interest rates flood the world with money. Part of the funds that should have flowed into factories and equipment instead sought an outlet and poured into land and stocks.

Here, the basic structure of a bubble appears. It is a cycle in which the price of assets themselves calls forth ever higher prices, far beyond the growth of the real economy. One borrows money from a bank against land as collateral, and uses that money to buy more land. The land, having risen in value, becomes still larger collateral, and lending swells again. The ‘land myth’ — the belief that the price of land never falls — was said to have taken deep root throughout society.

The end of 1989, to the summit

The frenzy became visible numbers in the stock market. The Nikkei average kept rising throughout the 1980s, and on December 29, 1989, at the final session of the year, it was said to have recorded an all-time high closing price of 38,915 yen. On that day closing out a year of trading, the market stood at the very peak of its rapture.

The surge in land prices was even more out of all reason. Land prices in central Tokyo reached astronomical levels, and comparisons such as ‘the appraised value of the Imperial Palace grounds could buy the entire state of California’ were frequently invoked. Companies came to earn more from the management of stocks and land — known as zaiteku, or financial engineering — than from their core businesses, and banks competed to expand real estate lending. The wave of speculation reached even golf club memberships and paintings, and the heat of consumption, symbolized by the Juliana’s Tokyo nightclub, colored the city streets at night.

At this time, many people believed it. That Japan’s prosperity was real, and that land and stock prices would keep rising from here on. The confidence of having become the world’s second-largest economy supported that conviction. Yet there is no balloon that swells forever. A summit is, by definition, the single point from which one descends.

Total volume restriction, and the plunge

The turning point came the year after the summit. As criticism mounted over the overheated land prices, in March 1990 the Ministry of Finance was said to have issued to financial institutions a ‘total volume restriction’ to curb the growth of real estate lending. At the same time, the Bank of Japan shifted to monetary tightening and raised interest rates.

The market, with its faucet abruptly shut off, cooled rapidly. Stock prices turned downward at the start of 1990 and fell sharply within that year. A little later, the land myth too crumbled. When land prices, which were supposed never to fall, turned downward, the very premise of lending against land as collateral collapsed. Devalued collateral, loans that could not be recovered — these gnawed gradually at the banks’ vitality as ‘non-performing loans.’

The collapse did not end as a single day’s event of a stock crash. Rather, it covered Japanese society as a slow, long-lasting downhill slope. The disposal of non-performing loans was delayed, wounded banks tightened their lending, companies held back investment, and the economy lost its vitality. It was said to have taken more than thirty years before the Nikkei once again surpassed 38,915 yen. It was the beginning of a long stagnation that would later come to be called the ‘lost decade,’ and then the ‘lost two decades’ and the ‘lost three decades.‘

What the frenzy left behind

The memory of the bubble still casts a deep shadow over Japanese society. The myth that land prices keep rising crumbled, and people strengthened their orientation toward saving and safety. The deep-rooted caution toward taking risks and investing is surely not unrelated to the pain of this era.

And yet, to dismiss this frenzy merely as ‘foolish euphoria’ is probably not fair. The excess funds of that era also left some things to later times, in the form of investment in urban redevelopment, infrastructure, and technology. Light and shadow are, here too, inseparably bound. The bubble made wealth vanish like a mirage, but at the same time it taught, as vividly as anything ever could, how deeply the market is bound up with the psychology of society as a whole.

When people see someone next to them making money, they try not to be the ones left behind. That crowd psychology has not changed at all since the age of tulip mania we saw in Episode 2. No matter how sophisticated the mechanisms become, what moves the market is, in the end, human hope and fear. Japan’s bubble was an event that thrust this universal truth before us, the people of the present day.

And while a wounded Japan was on the long road to recovery, across the sea in America, an entirely new technology was about to give rise to an entirely new frenzy. The next bubble, by the name of the internet.