Japan’s Bubble Economy

The rise of the 'bubble' economy during the second half of the 1980s was characterized by a speculative boom in asset prices and its eventual collapse at the beginning of the nineties proved to be detrimental to Japan’s financial and business sectors. The aftermath of the 'bubble', including the severe banking crisis, caused the monetary authorities to introduce important administrative and financial reforms. This paper rounds up the reasons behind the rise of the so-called ‘bubble economy’, why Japan was not able to sustain the ‘bubble’ and how it affected the downturn of the economy in Japan after the bubble burst. The conclusion about the bubble and its burst have revealed fundamental problems in Japan's economic and financial system. Japan's financial bureaucrats blindly ignored the obvious collapse of the bubble, simply because they had already decided to pursue fiscal austerity.

The stagnation of the Japanese economy is due to an exceptionally long-term shortage of aggregate demand. Apart from the lessons learned about the financial deterioration that the bubble economy had brought up, it is important to consider the roots of how the rise and fall of the bubble economy grew in Japan to avoid committing the same mistakes that almost threatened Japan’s economic security. Introduction Below par performance of the economy, an annual growth rate of Gross Domestic Product (GDP) nailed at 0. 5 percent and some ridiculously high rates of bankruptcies. This was the characteristics of a strange phenomenon in Japan’s financial sector from 1991 to 1999. After steady catch-up for 35 years rising from the ashes of the World War II, Japan’s economy did not only stop catching up, but lost ground relative to its potential to become an industrial leader around the world. Everything just slowed down in the late 1990s after enjoying a short p of a bubble economy. Do you know that 

Government Can Sometimes Improve Market Outcomes?

In the wake of the economic conflicts between Japan and the USA and Europe in the 1980s, the growth of East Asia as a market as well as a production platform, and the general rise in the value of the yen during the past decade, which has made investments in neighboring countries especially attractive, many Japanese businesses have forged ahead with strategic investments in the three core regions of the global economy. Read what to do when inflation is skyrocketing, and prices are out of control. What are banks most likely to ask the federal reserve to do with regards to government bonds and reserve requirements.

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The major boost in Japanese foreign direct investment (FDI) following the Plaza Accord of 1985 reached a peak in 1989, at the height of the Japanese bubble economy, and then fell back in the early 1990s after the bursting of the bubble (Harukiyo & Hook, 1998, p. 25). The rise of the 'bubble' economy during the second half of the eighties, which was characterized by a speculative boom in asset prices, and its collapse at the beginning of the nineties. The aftermath of the 'bubble', including the severe banking crisis, caused the monetary authorities to introduce important administrative and financial reforms.

But, what were the reasons behind the rise of the so-called ‘bubble economy’ that occurred in Japan during the 1980s? Why was Japan not able to sustain the ‘bubble’ that it suddenly burst in the late 1980s? What was the effect of the downturn of the economy in Japan after the bubble burst? The Definition and the Cause of the Bubble Economy What is the Bubble Economy? Harukiyo & Hook (1998) acknowledged that the ‘bubble economy’ is a metaphor used to refer to the hyperinflation of Japanese assets (e. g. stocks and shares, land and property) starting in the mid-1980s and the collapse of asset prices in the 1990s. Prices expanded in the mid-1980s, as in a bubble forming, and collapsed in the 1990s, as in a bubble being pricked. Experiencing an impressive economic growth between 1960 and 1985, Japan led a skyrocketing economy that was beyond their expectations. Japan experienced a strong surge in asset prices during the eighties, in particular in the second half. The Nikkei 225 stock-index rose from a level of 13,000 at the end of 1985 to a maximum of 38,915 on the last trading day of 1989.

During the 1985–1990 period, property prices surged, rising on average by 22% compared with a year earlier; in 1989 it was calculated that the property value of metropolitan Tokyo exceeded the value of the entire United States (Werner 1992, p. 22). This situation of excessive asset price inflation gave rise to the terminology of the 'bubble' economy. The Cause Van Rixtel (2002) generally believed that the following factors were behind the surge in asset prices: Increased Competition, More Regulation.

The process of financial reform increased competition not only among banks but between banks and other private financial institutions such as securities companies and insurance companies as well. The increased competition put heavy pressure on the banks' profit margins. As a result, banks started to look for more profitable, less traditional, but riskier projects: they expanded their lending to real estate and construction companies and non-bank financial institutions such as consumer credit institutions and leasing companies.

Because of existing regulations, these institutions were virtually denied access to the open financial markets, and therefore relied heavily on bank credit (Takeda and Turner 1992, p. 61). The figures show this development clearly: according to Nakajima and Taguchi (1995), p. 59, “between 1985 and 1992, bank loans to the real estate industry grew 13. 7 percent annually, compared with 6. 6 percent for total bank lending, and the share of such loans in total bank lending rose from 7. 5 percent in 1985 to 12. 1 percent in 1992”. In addition, lending to “non-banks” also grew rapidly, from 10. 4 percent to 14. 0 percent of total bank lending. It has to be mentioned that a number of these institutions were established by the banks themselves or were members of the same keiretsu or industrial grouping, thereby increasing the exposure of banks to these risky sectors. Furthermore, Japanese banks extended considerable amounts of credit to the corporate sector for investment in stocks and other financial assets.

This development of financial investments by non-financial private companies was called 'financial engineering' (zaitech or zaiteku), which means, literally, know-how in the management of financial assets (Hsu 1994, p. 406). For many non-financial firms, this became a major profit-generating activity. In addition, lending by so-called housing loan companies or jusen, which had been established at the end of the seventies under the guidance of the Ministry of Finance (MoF) and often in affiliation with large banks, grew rapidly (Rosenbluth and Thies, 1999).

In the end, Japan experienced a rather classic credit-induced real estate boom and financial assets' bubble, fuelled by a vicious spiral of rising asset prices, higher collateral value and increasing bank credit. This development was certainly not a unique Japanese experience, but occurred in a significant number of other developed and developing countries as well. Existence of Informal Policy Instruments and Networks. An important explanation of the creation of the 'bubble' is related to the use of informal policy instruments and the existence of informal networks between the monetary authorities and banks.

In general, the use of the former often turned out not to be effective, and the existence of the latter on numerous occasions prevented the use of prudent and stringent measures. For example, as will be asserted in this chapter, MoF's administrative guidance regarding the jusen's lending policy was not very effective, most likely owing to a combination of political factors and the large presence of MoF retirees on their boards. Also the informal guidance of bank lending by the Bank of Japan (BoJ), the so-called 'window guidance' (madoguchi shido), proved to be ineffective and was even abolished in 1991.

Steady Control of Short-Term Financial Markets

In personal interviews former staff members from the MoF and BoJ noted that one of the reasons for the rise of the 'bubble' could lie in the fact that the BoJ was in control of the short-term financial markets, but that the capital markets were mainly the domain of the MoF, and that coordination between the two was less than perfect. As a matter of fact, the MoF used several and predominantly informal macro monetary policy instruments that primarily affect capital market developments, sometimes contrary to the policy objectives of the BoJ.

Furthermore, arbitrage deficiencies between money market and capital market interest rates and the existence of the 'dual interest rate structure' hampered the pass-through of changes in policy rates to long-term interest rates. Protracted Easing of Macro Monetary Policy. The 'bubble' was fuelled by the accommodative stance of Japanese macro monetary policy, partly caused by international exchange rate considerations and related pressure from the MoF (Hamada 1995, p. 277).

This protracted monetary easing has been more or less acknowledged by the BoJ in its monthly report (Nippon Ginko Geppo) of April 1990, which has been interpreted as a self-critique of the Bank's policy stance during 1987–1989, and later in several other publications as well (Ito 1992, p. 48). The Louvre Accord of February 1987 aimed to stabilize the dollar and prevent a further depreciation against other major currencies. Consequently, the BoJ eased its policies: in February the official discount rate was reduced to an (at that time) historic low of 2. 5%. It remained at that level until the end of May 1989.

The low-interest-rate policy resulted in the creation of excess liquidity, and enabled the banking industry to keep the asset price boom going. In addition, the position of the BoJ was further complicated by the fact that the MoF was unwilling to boost public spending given its concern for the budgetary situation, so the BoJ had to provide the economic stimulation (Ueda 2000, p. 18). The accommodative policy stance during the middle and latter half of the eighties is clearly reflected in the high yearly monetary growth rates, which depicts the sharp increase in the Nikkei 225 stock index during the 'bubble' years.

Laxity of BoJ and MoF officials. During the creation of the 'bubble', Satoshi Sumita, a former high-ranking MoF official, was serving as Governor of the BoJ. Since the early seventies – and until the appointment of Mr. Masaru Hayami in April 1998 – the positions of Governor and Senior Deputy-Governor of the BoJ have been filled alternately by BoJ and former MoF top executives (in the case of the MoF, a former Administrative Vice-Minister). Furthermore, one retired MoF official occupied one of the BoJ's executive director positions, and another retired MoF official was employed as Executive Auditor.

The presence of these retired MoF officials in the highest executive positions of the BoJ, predominantly the consequence of MoF's need to find post-retirement positions for its staff in the private sector (amakudari), could have been instrumental in the implementation of the relatively loose monetary policy stance during this period. As pressures of inflation threatened to supersede, the BoJ changed its policy stance and began to tighten its policy in May 1989. This changed partially triggered the start of the collapse of the 'bubble'.

After some delay, the rise in interest rates deflated the value of assets such as land, real estate and stocks. According to Takeda and Turner (1992), the asset prices came down sharply. From its peak of around 39,000 in 1989, the Nikkei 225 dropped to the 14,000 range in August 1992; a similar development took place in real estate and land prices. Hamada (1995) explained that the bursting of the 'bubble' initiated severe problems for the Japanese banking industry.

Significant number of real estate companies and other non-banks found it increasingly difficult to service loans. Furthermore, the decline of asset prices diminished the value of the collateral of extended loans, in many cases below those of the loans they secured. Consequently, banks became saddled with non-performing loans, classified by the MoF as loans on which interest had not been paid for six months or more. The collapse of the 'bubble' and the subsequent deflation of asset prices caused problems in meeting the BIS solvency requirements.

According to the 1988 Basle Accord, international operating banks would, by the end of 1992, have to meet a capital to weighted assets ratio of 8%. The MoF interpreted this date as the end of Fiscal Year 1992, i. e. the end of March 1993. The capital taken into consideration consisted of core or Tier I capital, that is equity and disclosed reserves, and supplementary or Tier II capital, i. e. subordinated debt and revaluation reserves. In the case of Japan, up to 45% of banks' latent gains on securities holdings were allowed to be counted as Tier II capital.

According to the Anti-Monopoly Law, Japanese banks were allowed to hold up to 5% of the equity of a single firm. Given the rise in share prices during the 'bubble' period, these cross-shareholdings embodied substantial revaluation reserves, and consequently the unrealized gains on these securities holdings were included in Tier II capital (Frankel and Morgan 1992, p. 588). Naturally, the burst of the 'bubble' and the unbelievable drop in stock prices eroded this part of Japanese banks' Tier II capital, causing concern among Japanese and international supervisory authorities.

The erosion of the revaluation reserves of the major Japanese banks at the beginning of the nineties clearly showed a sharp decline. From 1991 to 1992 the reservation reserves were halved, resulting in a significant worsening of the solvency position of the Japanese banking sector. The rise in the issue of subordinated debt was also observed in this period, which was issued to compensate for the decline in Tier II capital that resulted from the decline in revaluation reserves.

The mistake clearly stood on the attempt to over-expand the economy and blatant misallocation of the capital. The Aftermath of the Burst Bubble As a result of the collapse of the bubble economy, the 1990s were detrimental for Japan, where it attained a measly average annual growth in real GDP of less than 1 percent from 1992 through 2002 and zero growth projected until 2004. High levels of corporate debt and stagnant domestic demand resulted in record numbers of bankruptcies, reaching 19,565 in 2001 and including 14 listed companies.

Losses associated with these bankruptcies also reached record levels, rising from 9 trillion yen in liabilities in 1995 to 21 trillion yen in 2000—a figure inflated by the failure of two major life insurance companies—and over 16 trillion yen in 2001. Moreover, unemployment increased every year from 1990 and 2002, rising from 2. 1 percent of the work force to 5. 3 percent. The proportion of the total unemployed who had been without a job for more than one year increased from 15 percent to 26 percent between 1993 and 2001.

The government’s fiscal budget declined from a 1. 5 percent surplus in 1992 to a 9. 2 percent deficit in 2000, and Japan’s public debt is the highest among the OECD nations (over 100 percent of GDP in 2002). Japan suffered from sustained deflation during the end of the 1990s and beginning of the 21st century, with the largest declines occurring in the investment goods sectors. Land prices declined at double-digit rates in the late 1990s but by only 9 percent in 2000. In 2001, consumer prices registered their largest decline since Second World War.

According to Ball (2004), the declining terms of trade after the collapse of the bubble economy have caused many Japanese firms to move investment overseas, particularly to low cost countries such as China, producing declining or negative trade balances with countries in recent years. Furthermore, Ball listed several conditions brought about by the collapse bubble economy: Declining Ranking on Competitiveness. The experiences of the 1990s and early 2000s have had a negative impact on the competitiveness ranking of Japan.

In the Global Competitiveness Report, Japan’s ranking declined from 13 to 21 between 1996 and 2002. The World Competitiveness Scorecard suggested an even greater decline in Japan’s relative competitiveness, from 3 to 30 between 1994 and 2002. Although Japanese multinationals have received great praise for their operational efficiency and Japan’s educational system has produced students who perform near the top in world comparisons, Japanese business has encountered problems in recent years.

Average annual growth in Japanese manufacturing productivity declined from 3. 9 percent in the 1980s to 2. 2 percent in the 1990s, compared to a rise in the United States from 3. 9 percent to 4. 1 percent, respectively. Annual growth in total factor productivity in the Japanese business sector was approximately 0. 75 percent during the 1990s, about 50 percent of the rate in the 1980s (Callen ; Nagaoka, 2001). Productivity levels among Japanese manufacturing exporters, including steel, auto, consumer electronics, and machine tools, exceed their U. S. counterparts by about 20 percent, but productivity in the domestic Japanese manufacturing and service sectors is approximately 68 percent of that in the United States (IMF Country Report, December 2001). Declining Investment in R;D. Japan ranks at the top in terms of international innovativeness (Porter ; Stern, 1999). Indeed, many Japanese companies invested heavily in R;D during the 1990s and early 2000s despite the overall economic problems in Japan, and they have established strong international positions as a result of their innovativeness.

Historically, Japan’s expenditures on R;D as a percentage of GDP have been the highest of any of the major world economies. Japanese investment in R;D has declined substantially since the early 1990s, however, and the proportion of GDP invested in R;D in the period 1993–1997 was lower in Japan than it was in the United States, France, and Germany. Barriers to Innovation and Entrepreneurship. The formation of new businesses has an important role in economic growth, exploitation of new ideas for innovative products and services, and efficient utilization of labor and other resources.

By international standards, Japan has low levels of new business formation. Japan ranked 20th in the Economic Creativity Index 2000 and was the lowest ranked among the top 25 nations in terms of the start-up index, a reflection of the substantial barriers to entrepreneurial initiative in Japan. Constraints on new business formation did not hinder the high rates of growth experienced in Japan until the late 1980s, since opportunities for technological catch-up and the opening of new export markets allowed for high rates of expansion by existing firms.

However, changes since the late 1980s have raised questions about the ability of large, traditional Japanese firms to develop the structural flexibility and entrepreneurial skills needed to generate growth in sales and employment. According to the Japan External Trade Organization, establishing a manufacturing facility is from 5 to 11 times more costly in Japan than it is in nations such as the United States, Germany, France, and the United Kingdom and even more costly than it is in the Asian NICs and NIEs (JETRO, 2000).

Limited Penetration of Information and Communication Technology

Although Japan represents an important source for developing ICT products and a lead market for many advanced cellular communication technologies, there is much room for improvement in the role of ICT. On most measures, the use of ICT in Japan exceeds that of the overall European region but is lower than that in the United States, U. K. , and Australia. Internet penetration and access to PCs among consumers, the educational use of the Internet, and the use of electronic commerce in Japan are considerably below those in the United States and other leading nations (Callen ; Nagaoka, 2001). In comparison, 40. 4 percent of the Japanese population had access to the Internet in 2002, versus 59. 1 percent for the United States. Most of Japan’s Internet is built on ordinary voice lines, with limited penetration of high-speed internet connection services.

In the business sector, a 2001 METI survey found that ICT investments in Japan tend to be focused on improved efficiency within existing operations and transactions, rather than oriented toward more far-reaching changes in corporate structure and operations. Comfort and familiarity of Japanese executives with the Internet was reported at 15 percent, compared to 64 percent among U. S. executives (Callen ; Nagaoka, 2001). Declining Role in Foreign Direct Investment. After the liberalization of capital controls in the early 1980s, Japan emerged as an important source of FDI, surging in the second half of that decade to nearly $50 billion in 1990. The growth in FDI reflected both strong economic growth in Japan and abroad as well as rapid appreciation of the yen, which encouraged Japanese firms to relocate production abroad to maintain cost competitiveness (Callen ; McKibben, 2001). Initially, much of the capital was directed to the United States, especially within real estate, service, finance, and insurance sectors.

This was followed by a dramatic increase in the level of investment going to emerging Asian markets, with a focus on industrial sectors. From 1987 to 1989, Japan accounted for over 40 percent of FDI into Korea and Thailand, and over 30 percent into Taiwan. The sharp decline in Japanese asset prices in the first half of the 1990s, combined with a slowdown in growth and the emergence of serious debt problems among businesses, yielded a substantial slowdown in FDI in the first half of the 1990s (IMF Country Report, December 2001).

Regulations and Restructuring

Despite continued pressure to promote restructuring and deregulation, relatively limited progress was achieved by the Japanese in the 1980s and early 1990s. Notably, the keiretsu continued to exercise strong influence, the financial sector was insulated from international competitiveness, and inefficient, often corrupt practices characterized many public works projects. In a cultural setting that did not allow for corporate or bank failure, problems were only papered over, not resolved, which prolonged the post–bubble economy crisis and permitted a chronic lack of confidence to settle in the business sector.

What the Japanese Government Do to Remedy the Situation

The extreme pressure of the sustained economic downfall caused by the collapse of the bubble economy did not disappear on its own. The Japanese government recently concerted its efforts to promote a number of institutional changes. To restructure the business sector, more than $1 trillion in bad loans, a situation exacerbated by sharp declines in the stock market that raise further concerns about the adequacy of banks’ capitalization, the Japanese government restructured the banking sector.

Changes include a number of mergers and sales of previously bankrupt banks and consolidation among the major banking conglomerates, although this sector continues to be plagued by nonperforming loans and weak balance sheets. In reaction, the Japanese government pumped more than $25 billion each year into public-works projects to generate economic activity. Then, to cut government spending, it raised the age for receiving national pension benefits from 60 to 62, and eventually to 65. The number of government ministries was cut to 13 from 22 to reduce redundancies.

Prime Minister Junichiro Koizumi, who enjoys the highest approval ratings of any Japanese leader since World War II, is trying to achieve structural reform, including the privatization of the post-office system, which handles mail and acts as a government savings bank. Mr. Koizumi also has promised an annual government bond issuance cap of 30 trillion yen (about $250 billion) from fiscal 2001, but the spending might exceed the amount with sudden uncontrollable expenditures like the deployment of the Japanese Self-Defense Forces to support the U. S. -led war against terrorism in Afghanistan (Tsukimori, 2001, p. 16). Significant performance problems among life insurance firms, and the failure of a string of mid-sized insurance companies, have also raised concerns about that sector and its need for restructuring. Five of Japan’s the initial 7 major insurance companies that failed were taken over by major foreign companies, along with 3 smaller insurance companies. Thus, all of the government’s efforts were collectively called the “Big Bang” restructuring of Japan’s financial sector after 1997.

This has resulted in a continuing surge of entry by foreign financial institutions from the United States and Europe (Ball, 2004). With his onerous yet insightful analysis of all the events that transpired, Tokyo University Economics Professor Hiroshi Yoshikawa comprehensively explains in his book Japan’s Lost Decade (2001) how the world's second largest economy has stagnated in the 1990s and the difficult choices Japan confronted at this crucial moment of transition. After the collapse of the "bubble economy" of the late 1980s, the 1990’s ushered in with a bleary phenomenon tagged as the Japan’s “lost decade”.

Since this has been one of the most extraordinary economic phenomena, no other country has moved so quickly from the top to the bottom of the world's economic growth league. What could be the possible causes of the long stagnation of Japan during the 1990s? Since the bubble burst, economists have focused on the financial problems. A fall in asset prices allegedly had the negative wealth effect on household consumption. Through deterioration of collateral, it also hurt investment of small firms. And banks suffering from bad loans became reluctant to make new loans (kashi-shiburi), and further depressed investment.

Three factors have been pointed out to be the main causes of the “lost decade”, namely, the structural decline in labor input growth (Yoshikawa described the labor market in the “ice age”), slowdown of the total factor productivity (TFP) growth and the scarcity of demand. In addition, the characteristics of the early stages of Japan’s “bubble economy” saw the rise in land prices, the rates of increases differed greatly depending upon the land use (commercial, residential or industrial) and the location (major population centers such as Tokyo, or elsewhere).

In other words, land prices were driven up because of increasingly brisk investment in land by companies, particularly by medium-sized and small non-manufacturing firms, due to rises in expected rates of returns from land in commercial areas in Tokyo, and partly because of erroneous measures implemented by the government, and were not closely related to interest rates. These companies bought up land using funds borrowed from banks, so after the collapse of the bubble economy, their financial state deteriorated drastically and the loans became bad debts.

By providing an overview of the Japanese economy, Yoshikawa elaborated the extremely poor performance of corporate investment is the most important factor to explain the long stagnation of the Japanese economy during the 1990’s. Another question that we could draw out in the book is why investment stagnated during that time. The popular answer is a credit crunch caused by bad loans banks hold. There is a good consensus that the effect of credit crunch is much more serious on investment of small firms than that of large firms because large firms have better access to capital markets.

On the other hand, much controversy is bared as two groups have differing views on the real causes of the “lost decade. ” A group of scholars attributes the disappointing performance to a lack of effective demand and a liquidity trap caused by deflation, while another group points out that there are several important supply-side factors, which reduced Japan’s economic growth. For example, Japan’s aging population and a gradual reduction in the statutory work-week have contributed to a slowdown in the growth of labor input.

Japan also experienced a decline in total factor productivity (TFP), which has important effects on economic growth not only because it reduces output growth by itself but also because it diminishes the rate of return to capital and discourages private investment (Motonishi and Yoshikawa, 1991). Although there are as many different estimates for Japan’s recent TFP growth as there are studies on this issue, most economists seem to agree that Japan’s TFP growth substantially declined in the 1990s.

Probably the most popular explanation of Japan’s TFP growth slowdown is the “zombie” hypothesis. This states that in order to conceal their bad loans, Japanese banks have been keeping alive money-losing large borrowers by “evergreening” loans and discounting lending rates, although the chance that these borrowers will recover is slim (Caballero, Hoshi and Kashyap 2004). Because of the existence of zombie firms, the entry and growth of more productive firms are impeded and TFP growth slows down in industries infested by zombies (Ahearne and Shinada 2004). Japanese banks’ bad loans are concentrated in non-manufacturing sectors, such as real estate, construction, commerce, and services, since a major cause of the bad loans is the burst of the land price bubble in the early 1990s. The effects of the real factor on investment are much more significant than those of the financial factor. In particular, a fall of investment during 1992 to 1994 was basically caused by worsening real profitability; during the same period, financial factor was supportive.

However, beginning 1997 amid recession, the credit crunch finally occurred. Based on Yoshikawa’s investment equations, the estimates of the effects of the credit crunch on investment as a whole. Conclusion If the circumstances in Japan’s “lost decade” or the bursting of the ‘bubble’ are viewed from the aspect of the macroeconomics, the parties selling land to companies at inflated prices during the bubble economy were households. Therefore, households realized huge capital gains by selling land to companies at high prices.

A more detailed investigation into the capital gains made by households revealed that during the bubble economy a very limited number of households with high income realized huge capital gains, while most households saw little rise in their assets. The enormous gains realized by very few households were deposited and did not lead to effective demand. Japan's magnificent liquidity machine for the financing of its "total war" economic mobilization achieved its aim, and then, unchecked, went on to drown Japan and the world in excess savings.

The system was destroyed by its own processes. All the elements of the 1940 structure are, by design or by default, now coming undone. The revisions to the Bank of Japan Law, while thoroughly inadequate, will give the central bank more independence to run monetary policy in the best interests of balanced economic growth rather than a frenetic economic mobilization. Most of Japan's commercial banks came under extreme duress and many failures were realized (Hartcher, 1998). Thus, the collapse of the system should not come as a surprise to the finance bureaucracy. Prior to that phenomenon, Dr. Sakakibara in 1977 already warned that the financial system had "at last begun to disintegrate", and understood that "monetary and fiscal controls cannot work where a strong demand for investment does not exist. " Or, in other words, where there is too much saving and not enough investment.

And it was Sakakibara and Noguchi, who likened the postwar economy of Japan to a bicycle: "Unless one pedals fast enough, there is a danger the bicycle will fall over. " The high-growth postwar economy, the "1940 system" catch-up model, was, they wrote, "a contradictory and unstable structure that could only be sustained by continued growth"(Sakakibara and Noguchi, 1977). The bubble and its burst have revealed fundamental problems in Japan's economic and financial system. Japan's financial bureaucrats blindly ignored the obvious collapse of the bubble for well over a year, simply because they had already decided to pursue fiscal austerity. The stagnation of the Japanese economy is due to an exceptionally long-term shortage of aggregate demand. As Japanese firms currently strive to sustain their competitive advantage in their superior ability, the collapse of the “bubble economy” should just be viewed as a thing of the past.

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