How/Why did the Bubble era of Japan begin and end?


Hello folks.

I’ve always wondered how Japan was able to amass such immeasurable wealth in the 1980s and immediately lose it in the 1990s. What factors led to such a period in Japan’s economy?

Any simple explanation would soothe my inquisitive spirit regarding this question. Thank you!

In: 6

Imagine you have a lemonade stand that becomes super popular. You sell lots and lots of lemonade, and you get lots of money. That’s like Japan in the 1980s – they made many cool things like cars and electronics, and people all around the world bought them.

Then, you think your lemonade stand is doing so well that you start spending lots of money on stuff like fancy cups and decorations, thinking it’ll keep getting better. But suddenly, people stop buying your lemonade because they find other options.

That’s like Japan in the 1990s – they spent too much money on things like land and buildings, thinking their success would last forever. But other countries started making cool things too, and Japan’s economy slowed down. The money they spent didn’t help them as much as they thought, and they lost a lot of their wealth. And that’s why Japan’s economy went from really good to not-so-good.

Well your understanding is a bit incorrect.

Japan industrialized very quickly after WW2. The focus was on heavy industry, automobiles, electronics, electronic manufacturing equipment, chemicals and consumer electronics. It had a large, well educated and homogenous population making it somewhat easier to enact industrial policy at a nationwide scale. Japan grew to the 2nd largest economy by the 1980s. All of this was supported by a fairly open trade policy with the US (primarily) and Western Europe that allowed them to grow their domestic firms.

In the early 1990’s the problems started to become evident. A lot of growth was supported by domestic banks lending to industries (and being a bit too closely linked to them). As the yen strengthened, their exports began to lose competitiveness with the other Asian “tigers” – S Korea, Taiwan etc. China opening up both boosted Japan’s ability to off shore their business and also became competitors for low end products domestically.

From the 2000’s until today, Japan is the 3rd largest economy in the world. It cannot be described as poor on total or per capita basis. The GDP per capita is one of the highest globally if you exclude micro-nations despite having a large population. There are few countries with a higher standard of living. (Japan has more people than Germany, UK etc and maintains a similar GDP per capita making them very wealthy country.)

Although domestic growth has been limited, a full picture has to include Japanese offshore factories. Demographically, Japan has an aging and shrinking population. This leads to a liquidity trap situation where domestic savings being rather high lead to lack of domestic consumption.

Japan focused a lot on automation and quality. They had population primarily in the peak age for production and work output, and were able to quickly and seriously compete with US manufacturers of things such as electronics and cars.

Their demographic advantage was short lived, and soon after US companies began heavily modernizing in order to compete.