Japan's+Bubble+Economy

The Japanese bubble burst at the end of the "miracle years" — a 30-year period when the economy headed in only one direction: up. When the gap between competitive pressures in the financial markets and a "convoy" style of banking supervision and regulation that, in effect, ensured the viability of the weakest banks became unsustainable, the crisis erupted. In the late 1980s, abnormalities within the Japanese economic system had fuelled a massive wave of speculation by Japanese companies, banks and securities companies. Briefly, a combination of incredibly high land values and incredibly low interest rates led to a position in which credit was both easily available and extremely cheap. This led to massive borrowing, the proceeds of which were invested mostly in domestic and foreign stocks and securities. Recognizing that this bubble was unsustainable (resting, as it did, on unrealizable land values - the loans were ultimately secured on land holdings), the Finance Ministry sharply raised interest rates. This popped the bubble in spectacular fashion, leading to a massive crash in the stock market. It also led to a debt crisis; a large proportion of the huge debts that had been run up turned bad, which in turn led to a crisis in the [|banking] sector, with many banks having to be bailed out by the government. Both housing bubbles involved reckless lending and high-flying real estate — commercial in Japan Everyone assumed that prices would continue to climb indefinitely. Ben bernanke who blamed "exceptionally poor monetary policymaking" for the country's protracted malaise. The central bank's failure to lower interest rates in the early 1990s ultimately drove the economy into a deflationary death spiral, according to the Princeton academic. The period between 1985 and 1990 was a time of unprecedented affluence inJapan. But it was also a period of unparalleled corruption, extravagance and waste. Banks began freely lending to corporations and individuals; much of the credit funneled into real estate. Land prices began to increase quickly and much of this newly created equity was used to borrow more money. New loans were used to purchase more land and speculate in the stock market. Simultaneously, falling land and equity prices were erasing household wealth and resulting in a sharp curtailment of credit because of the heavy exposure of Japan's banks to the commercial land bubble. The combination of higher consumption taxes, the continued fall in land prices that persisted in preventing Japan's banks from operating as financial intermediaries because of their heavy exposure to real estate losses, and a rapid return to deflation in 1998 resulted in a virtual collapse of the Japanese economy many Japanese firms were lumbered with massive debts, affecting their ability for capital investment. It also meant credit became very difficult to obtain, due to the beleaguered situation of the banks; this has led to the phenomenon known as the "lost decade"; economic expansion came to a total halt in Japan during the 1990sMore ominously, however, credit markets have largely ceased to function, save for the highest quality loans, suggesting that a sharp reduction in the quantity of credit available at market-clearing interest rates is threatening to curtail real economic activity by more than the seemingly benign level of market interest rates would suggest.
 * 1) **What was the cause of the Bubble and what broke the Bubble?/ When the Bubble began and ended? **
 * 1) ****What was life like during the Bubble? Be very specific and find specifics examples. Provide some economic indicators to show how great the economy was. ****From the borrowed funds Japanese banks lent extensively. They lent out 69 trillion Yen. They provided $30 to $40 billion to finance American leveraged buyouts, including $10 billion of the $25 billion LBO of RJR Nabisco.
 * 2) **What happened after the Bubble? Be very specific and find specifics examples. Provide some economic indicators to show how great the economy was. **



the Bank of Japan remained concerned about inflation pressures. The Bank of Japan actually boosted the discount rate from 4.75 percent to 6 percent in August 1990 and held it at that level until June 1991Japan ramped up government spending on public works projects, including bridges and river "improvement" programs that literally lined many waterways with cement. But it didn't wJapan's large fiscal stimulus packages, which became legendary during the 1990s, were ineffective for several reasonsork Japanese banks were the biggest victims of the country's real estate bust. They were in danger of insolvency, yet Japan's central bank was slow to intervene. Eventually, in 1995, the Bank of Japan began to cut interest rates, and today they are near zero percent Very little government intervention was even suggested as asset values skyrocketed. government attempted to resuscitate the economy with big public works projects, but nothing seemed to work. The next ten years came to be known as Japan’s “lost decade” as the nation struggled to emerge from a lengthy trough. Consumers went back to their extraordinarily austere traditions vowing never again to abandon the country’s moral, social, and cultural values <span style="font-family: 'Times New Roman','serif'; font-size: 16px;">Japan's sharp interest rate reductions and sizeable public works programs did help to boost the economy mid-decade. <span style="color: #111111; font-family: 'Times New Roman','serif'; font-size: 16px;">Japan's biggest policy mistake came in 1997 when the government raised its consumption tax from 3 to 5 percent. The combination of higher consumption taxes, the continued fall in land prices that persisted in preventing Japan's banks from operating as financial intermediaries because of their heavy exposure to real estate losses, and a rapid return to deflation in 1998 resulted in a virtual collapse of the Japanese economy <span style="color: black; font-family: 'Times New Roman','serif'; font-size: 16px;">This has combined with the traditional Japanese emphasis on frugality and saving ( [|savingmoney] is a cultural habit in Japan) to produce a quite limited impact on the average Japanese family, which continues much as it did in the period of the miracle
 * 1) **<span style="font-family: 'Times New Roman','serif'; font-size: 16px;">What role did credit play in the beginning of the Bubble? **
 * 2) **<span style="font-family: 'Times New Roman','serif'; font-size: 16px;">What role did the government play before and after the crisis? **
 * 1) **<span style="font-family: 'Times New Roman','serif'; font-size: 16px;">In your opinion, why was it said that this event/bubble was different? **
 * 2) **<span style="font-family: 'Times New Roman','serif'; font-size: 16px;">What was done after the bubble burst? What did they do to ensure this would not happen again? **

<span style="font-family: 'Times New Roman','serif'; font-size: 16px;">[] <span style="font-family: 'Times New Roman','serif'; font-size: 16px;">[] <span style="font-family: 'Times New Roman','serif'; font-size: 16px;">[] <span style="font-family: 'Times New Roman','serif'; font-size: 16px;">[] <span style="font-family: 'Times New Roman','serif'; font-size: 16px;">fcee.wikispaces.com/file/view/**JAPANESE**+**BUBBLE**.doc
 * <span style="font-family: 'Times New Roman','serif'; font-size: 16px;">Work Cited **

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