By Mark J. Ravina, University of Texas at Austin
The bursting of Japan’s asset bubble forced a recognition that Japan’s era of high-speed growth was over. The stock market and other asset markets could not keep growing at double-digit rates. Japan was now a mature economy, and mature economies can aspire to sustain only single-digit growth.
Tough Love Response
The ‘tough love’ response is a supply side economic strategy. The logic is that the economy is full of badly allocated assets—money and people tied up in ventures that just aren’t profitable—and the only answer is many bankruptcies. Many bad companies just need to die and free up workers and assets for better companies. Massive unemployment and bankruptcies are terrible but a necessary evil, and they must be allowed to happen because in the long run they lead to economic recovery.
However, John Maynard Keynes, in his critique of classical economics, noted that while massive unemployment and bankruptcies eventually lead to efficiencies, in the long run, the pain and trauma of a massive economic correction can ruin lives, as well as destroy political systems.
Stimulus Packages
Liberal economics focuses more on the consumer side of things. It opts for stimulus packages.
The thinking is that after a huge correction, people are scared, and they hold onto whatever they still have after the crash. They stop spending. But that only makes the crash worse, as that fear of spending drives even good companies into bankruptcy.
To avoid this, Keynes’s solution was to throw money at the problem. Give people money and make them spend it. Give them so much money that you start to cause inflation, as inflation means that your money will be worthless tomorrow. You are incentivized to spend money now to get its full value.
The logic is that inflation and government debt are necessary evils; that pouring money into the economy shocks people out of their depression.
Of course, the economy needs both consumer confidence and the disappearance of insolvent firms. The question is how to get both?
This article comes directly from content in the video series The Rise of Modern Japan. Watch it now, on Wondrium.
Indecisiveness of the Japanese Government
For a full decade after the 1990 crash, the Japanese government managed neither. It spent a full decade vacillating; not quite willing to take the tough love approach and force the consolidation, or the collapse, or national takeover of insolvent banks, and also refusing to just pour money into the economy with the explicit goal of inflation.
Only in the late 1990s did the government began to force banks to consolidate through a series of huge mergers. And only after that did it push for the banks to write off bad debts.
‘Zombie Banks’
In the meantime, the government kept buying bank stocks to keep them afloat. That was supposed to help the banks to extend credit to new businesses. But Japanese corporate culture pushed in the opposite direction. Instead of writing new loans, banks kept refinancing old customers because it was in their interest to do so.
The huge Japanese banks kept extending credit to insolvent companies. On paper, the banks looked somewhat solvent because they hadn’t yet been forced to write off their bad loans. But In reality, their borrowers were on life support. This led to the term zombie banks. That described lenders that were neither dead nor alive but staggering around, feasting on central government support but not actually working as banks.
Japanese Policy: Neither Liberal nor Conservative
Conservative economists argue that the banks still haven’t cut off their weaker customers. They still haven’t cleaned up their balance sheets. They argue that lots of lingering bad debt explains why the Japanese economy seemed to recover in the early 2000s but was clobbered again by the 2008 financial crisis.
Liberal economists argue much the same but in reverse. From their perspective, the Japanese government was too timid on stimulus. Not until 2012 did Prime Minister Abe Shinzō commit to a stimulus strategy, setting an explicit government goal for inflation of 2%.
A liberal economist would argue the 2% target was too low and not credible. In fact, inflation did not even hit 1%. Since the 1990s, Japan has had several years of deflation, with prices falling, and zero or even negative interest rates. Liberal economists argue that Japan needed to hit a big inflation target to shock Japanese consumers out of their frugality mindset.
So, there’s a striking consensus that instead of a coherent liberal or conservative policy—instead of fire or ice—Japanese policy was three decades of tepid water.
Mature Economy
Moreover, the bursting of the bubble showed that Japan’s era of high-speed growth was over. The economy wasn’t growing by double digits, and so the stock market and other asset markets could not keep growing at double-digit rates.
Japan was now a mature economy, and could aspire to sustain only single-digit growth. A mature economy does not only mean an economy that has moved many of its workers from industrial into post-industrial jobs, but also means an economy with an aging population.
An aging population is terrible for consumption. Older consumers defer new expenditures. And while retired workers have spent their lives paying into things like government pensions and health plans, once they’ve retired, they are a net drag on those plans, pulling money out instead of putting new money into the system.
Looking back on the decades since the bubble burst, one key lesson is that anomie and diffuse discontent aren’t conducive to economic growth and consumer confidence.
Common Questions about Japan’s Asset Bubble
A ‘tough love’ response is a supply side economic strategy. The logic is that the economy is full of badly allocated assets—money and people tied up in ventures that just aren’t profitable—and the only answer is lots of bankruptcies.
The bursting of the bubble showed that Japan’s era of high-speed growth was over. The economy wasn’t growing by double digits, and so the stock market and other asset markets could not keep growing at double-digit rates. Japan could aspire to sustain only single-digit growth.
A mature economy means not only an economy that has moved many of its workers from industrial into post-industrial jobs, but also means an economy with an aging population.
