Crash Nº 5 · 1985–2003
Japan’s Twin Bubbles
Stocks and land inflate together, then deflate for a decade
−80% Nikkei 225, December 1989 peak to April 2003 trough
The Setup
The displacement was diplomatic. At the Plaza Accord in September 1985, Japan agreed to let the yen soar to shrink America’s trade deficit — and the yen promptly doubled against the dollar. Terrified of an endaka recession in its export machine, the Bank of Japan cut its discount rate to a then-unheard-of 2.5% and left it there for two years while the economy boomed.
The cheap money met a financial system built to amplify it. Japanese banks lent against land — and Japanese land “never fell.” Corporations, flush with cheap capital, ran zaitech trading books beside their factories. Banks and industrial groups held each other’s shares, and regulators counted the unrealized gains as bank capital.
At the top, the grounds of the Imperial Palace were notionally worth more than California, and Tokyo golf-club memberships traded like securities — with their own listed index.
Displacement, 1985–86
The soaring yen is supposed to slow Japan down. Instead, emergency interest rates redirect the export machine’s savings into assets at home. The correction becomes the accelerant.
Boom, 1987–88
Tokyo shrugs off Black Monday in a week — proof, it seems, that Japanese finance plays by better rules. Land collateral, zaitech profits, and cross-holdings compound; the Nikkei doubles while Japanese earnings grow a fraction of that.
Euphoria, 1989
Price-earnings ratios above 60 are explained away with new arithmetic — hidden assets, land values, uniquely Japanese growth. On the year’s final trading day the Nikkei prints 38,916, a number that will hang over Japan for thirty-four years.
Distress, 1990
A new BOJ governor raises rates five times to 6% to kill the land bubble specifically. Stocks fall 40% in a year, but land barely moves at first — and because land is the collateral, the banking system still looks solvent. The rot spreads out of sight.
The long deflation, 1990–2003
There is no Black Thursday — just thirteen years of lower highs. Land follows stocks down; borrowers become zombies rolled over by banks whose capital was the bubble itself; Yamaichi, a Big Four broker, fails in 1997. The Nikkei bottoms at 7,608 in April 2003, eighty percent below the peak.
The Reckoning
Japan’s crash is the book’s great counterexample to 1929: the authorities did eventually lend freely, nobody queued outside banks, and the price was paid instead in decades — deflation, zombie firms, and a lost generation of growth. A credit bubble collateralized on land does its damage slowly, through the banking system’s balance sheets, whether or not anyone panics on a single famous day.
What it cost
The collapse produced no single catastrophic day, so its toll surfaced as accumulation. Japan’s suicide count jumped from 24,391 in 1997 to 32,863 in 1998 — a rise Chen, Choi, Mori, Sawada and Sugano find was closely related to unemployment, most of it among people aged 45 and over — and stayed above 30,000 every year until 2011. The generation that left school into the slump, Japan’s “employment ice age” cohort, is still working it off in middle age.
- 24,391 → 32,863 annual suicides recorded by the National Police Agency, 1997 to 1998; of the 34.7% rise the unemployed contribute 15.07 points, the employed 9.28 and the self-employed 5.44 — the unemployed here including elderly retirees Chen, Choi, Mori, Sawada and Sugano, Recession, Unemployment, and Suicide in Japan, Japan Labor Review, 2012, Table 1
- 14 years straight years the annual count stayed above 30,000, from the 1998 jump until it fell to 27,766 in 2012 Otsuka and Horita, Statistics on Suicides of Japanese Workers, Japan Labor Review, 2013, on National Police Agency figures
- ~300,000 men aged 35–44 still working as freeters — part-time or temporary — in 2017, down from 340,000 in 2012; Hori places the “employment ice age” generation in their late 30s and early 40s Hori, Japan’s “Employment Ice-age Generation” Today, Japan Labor Issues, JILPT, 2019
On 24 November 1997 Yamaichi Securities, one of Japan’s “Big Four” brokerages, gave up its licence under ¥3.5 trillion in liabilities, ¥264.8 billion of them hidden off its books for years. It was the largest company to collapse in Japan since the end of the Second World War, and Kyodo News put the job losses at about 7,500. “It breaks my heart that the situation has turned out like this,” its president, Shohei Nozawa, told the news conference, apologising to customers and investors. When Merrill Lynch bought 33 Yamaichi branches the following year, it hired about 2,100 of the staff.
What followed
The recession that followed the bubble was one of several forces, not the sole cause, behind the end of the LDP’s unbroken rule since 1955. Britannica records that political corruption had by then become almost endemic and the party was racked by a succession of scandals, while slowing growth and widening income disparities heightened public sensitivity to it. Prime Minister Miyazawa’s attempt at reform legislation cost him the support of key LDP members, and in the July 1993 election the LDP lost its Diet majority to a coalition of opposition parties.
Encyclopaedia Britannica, Japan — Political developments