By Mark J. Ravina, University of Texas at Austin
The term baburu keizai is Japanese for ‘bubble economy’. It refers to the swift rise in Japan’s asset prices—primarily stocks and real estate—beginning around 1985, as well as their continued growth for the next five years, and then the rapid collapse of those prices in 1990. The Japanese bubble was an asset bubble that was similar yet different from others.
Size of Japan’s Bubble
First, size matters. The magnitude of Japan’s economic correction was huge. The Japanese Nikkei stock index corrected by more than 50%, and then continued to drop even further. From peak-to-trough asset values fell by an incredible 75%!
And the Japanese bubble hit banks, stocks, and real estate. Imagine something like the US savings and loan crisis of the 1980s, the dot com bubble of the late 1990s, and the real estate bubble that burst in 2008. Imagine all of those combined in one massive collapse.
So, the Japanese bubble was huge.
This article comes directly from content in the video series The Rise of Modern Japan. Watch it now, on Wondrium.
Extremely Slow Recovery
Also, Japan’s recovery has been excruciatingly slow. If one compares the Japanese bubble to any in United States history, they’ll get a good idea of what this means.
Consider that if one bought US stocks before any of the post-World War II asset bubbles, one only needed to hold tight for three to five years to recover. So, as a personal investor, if one followed basic investing advice—don’t buy stocks if you might want the money soon—one just needed to be patient.
But not in Japan. The Nikkei index peaked in late 1989 at nearly 40,000. It then fell to below 8,000. Three decades later, it finally got above 20,000. So, in Japan, even conservative ‘buy and hold’ investors got mauled.
Much the same happened with housing prices. After the US real estate asset bubble burst in 2008, full recovery took, on average, 10 years. But again, not in Japan. In Tokyo it took 30 years for prime condos to recover their former peak values. And in most of the country, home prices continue to be a fraction of their peak.
Japan’s Identity Crisis
And lastly, when the bubble burst in Japan, it was part of a shift in Japan’s entire postwar world. The economic crisis was part of a crisis of Japanese identity.
Here’s an example of that identity crisis. Japan’s Shōwa emperor, Hirohito—who had served since 1925—died in January 1989. His death opened up the question: “What was his reign about?” And this raised an even more profound question: “What was Japan about?”
The roaring economy of the 1980s seemed to offer an answer to both of these questions. There was a joke circulating around Tokyo at the time: “Why were we once so stupid as to attack Hawaii when we could have just waited and bought it?” Implicit in the joke was a sort of rehabilitation of the Shōwa emperor. Whatever the emperor did—or failed to do—during World War II, he had presided symbolically over the rise of Japan’s second empire—its peaceful economic empire. So, he was there when Japan got its empire right the second time.
Except that a year after his death, the economic empire was collapsing. With the Nikkei stock index plummeting from 40,000 in 1989 to 15,000 in 1990, Japan no longer looked like an economic empire. Or if it was an empire, maybe the earlier Japanese empire in around 1945.
No End of Cold War in East Asia
Added to economic crisis, the entire balance of power in the world was changing. When the Berlin Wall fell in 1989, the bipolar world of capitalism versus communism seemed at an end. Capitalism and liberal democracy had triumphed decisively. Japan was on the winning side in the struggle of capitalism vs communism. But there was no euphoria in East Asia.
In Europe, the Berlin Wall came down, creating a unified Germany. But in East Asia, there was no unification of the two Koreas. Instead, North Korea’s Kim dynasty kept chugging along, an amazing combination of Confucian monarchy and Stalinism. It was just as scary as ever. As for China, it rejected the Soviet model of glasnost reforms to increase government transparency. Instead, it opted for the violent suppression of public dissent as exemplified by the Tiananmen Square massacre in June 1989.
So, the Cold War didn’t really end in East Asia. What did change was that the Chinese Communist Party got really good at industrial capitalism.
So, Japan didn’t get to enjoy the end of the Cold War even though it was on the winning side.
Common Questions about Japan’s Bubble Economy from 1985 to 1990
The magnitude of Japan’s economic correction was huge. The Japanese Nikkei stock index corrected by more than 50%, and then continued to drop even further. From peak-to-trough asset values fell by an incredible 75%! And the Japanese bubble hit banks, stocks, and real estate.
After the US real estate asset bubble burst in 2008, full recovery took, on average, 10 years. But that was not so in Japan. In Tokyo, it took 30 years for prime condos to recover their former peak values.
In East Asia, there was no unification of the two Koreas. As for China, it rejected the Soviet model of glasnost reforms to increase government transparency. Instead, it opted for the violent suppression of public dissent as exemplified by the Tiananmen Square massacre in June 1989. So, the Cold War didn’t really end in East Asia, and Japan did not get to enjoy its end.
