Japanese Asset Bubble Analysis

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A proper understanding of the Japanese Asset Bubble would be incomplete without understanding the history of the Japanese economy. Before World War II, the Japan economy was dominated by the large family-controlled industrial and financial business conglomerates known as zaibatsu (“financial clique”). Most corporations within a conglomerate carried the same brand name, example: Mitsubishi Bank, Mitsubishi Corporation, Mitsubishi Heavy Industries and Mitsubishi Motors. Post the war, the economy started rebuilding through the success of the electronics and the automobile manufacturing industries. By the 1980s, the GDP of Japan revived and it’s GDP per capita even surpassed that of many western countries. This resulted in a better standard…show more content…
In the wake of globalisation, the country had market driven interest rates. New financial instruments were established and a competitive bond market was created. Banks started to take increasingly excessive risks that were partly funded by 186 trillion Yen borrowed from various capital markets. The overconfidence also resulted in speculation of domestic stock and real estate, pushing up the prices of these assets. From 1985 to 1989, Japan’s Nikkei stock index tripled to 39,000 and accounted for more than one third of the world’s stock market capitalization (Economist,…show more content…
Analysis Even though the government started deregulations in 1970s and they were phased over a period of time, the government missed creating a strong regulatory system in case of financial failure. Big financial institutions were always considered too big to fail, and therefore, stringent governance wasn’t considered important. Deregulations always generates more competition. In the case of Japan, banks continued to take more risk yet their capital base continued to be small due to the loss of guaranteed profits. The too big to fail mind-set led to huge dependence of banks on the government. As the process was laid out over a few years, it took MoF a long time to realise that it could not guarantee the bailouts of all banks. In addition, while deregulation can be beneficial, the deregulations in Japan were left to carry on for too long. As this was accompanied by financial prosperity, it let to creation of a bubble for assets and stock. The government increased the interest rates, and the bubble burst which led to an economic downturn. Another mistake made by the regulators was presuming that the economic downturn would just pass. There were very few preventive steps taken by the government till as late at 1995 (lowering the interest rates to encourage

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