1989. Tokyo, Japan. The Nikkei hits a record high in the eight of the world's ten largest companies are Japanese.
Japan is dominating and America is terrified. Japan's GDP per capita is 10% higher than America's. The Rockefeller Center, an American icon, is owned by the Japanese.
And movies like Blade Runner. Imagine a future ruled by the Japanese. It felt like the rising sun would never set.
Or so it seemed. In 1990, the Nikkei dropped 38% and lost $2 trillion of market value. And even now, in 2024, Japan's wages have yet to recover to levels seen during the economic miracle.
So what went wrong? This is Japan. The setting of the rising sun.
To understand Japan's economic miracle, we need to go back to the late 40s. Following its surrender, Japan became partially occupied by the US government, and its economy entered a recession not long after the country was in shambles. Its factories were destroyed, much of its labor force was dead, and trade relations frayed.
The US was deeply worried that Japan, like China, would fall into Communist arms. To prevent this, they initiated aggressive economic reforms. They dismantled the Zaibatsu system, which concentrated wealth and power among a few families.
They reformed land ownership laws, giving ordinary Japanese citizens a stake in the economy. And most importantly, they turned Japan into an export powerhouse. First, by supporting the Korean War effort, then by fueling industrialization with low interest loans.
The results were incredible. From 1953 to 57, exports of Japanese manufactured goods increased by 143%. Compare this to the United States had 51% and the United Kingdom at 31%.
But Japan was just getting started. In 1959, low cost textiles still dominated Japanese exports, with much of this heading to unstable and poor Asian markets. Recognizing this, the Ministry of Trade and Industry launched a new industrial policy, pushing Japan towards high tech, high quality manufacturing and stronger trade partners.
This marked the beginning of Japan's manufacturing renaissance, supported by foreign direct investment and a strengthening economy. Japan invested heavily in manufacturing, given much of their industrial base was destroyed during World War Two. They had to start from scratch, importing world class technologies to create the most advanced manufacturing footprint in the world.
By 1965, Japan had a trade surplus, and by 1970 the country had grown exports by 380%, becoming the fifth largest economy on Earth, growing GDP fivefold and eclipsing China, France, the UK and West Germany. Japan's economy showed no signs of stopping and continued to grow at an average rate of 5% a year for nearly 15 years. The key driver for this was exports.
If Japan made it, the world bought it. This helped Japan become extremely wealthy, and Japanese citizens started getting a taste of the finer things in life. In 1978, Louis Vuitton entered Tokyo's Ginza district and quickly became one of their best performing stores.
Hermes followed suit in 1979, and by the 80s, Prada and other luxury giants were firmly rooted in Japan. Seeing record sales, Japan was booming. Meanwhile, in the US, companies were kicking and screaming.
Between 1980 and 85. The dollar appreciated nearly 50%, putting intense pressure on domestic manufacturing to address this. The US, France, the UK, West Germany and Japan met and signed the Plaza Accords.
The agreement was simple. The Japanese yen needed to depreciate relative to the US dollar, strengthening the American export economy and weakening the surplus that Japan had. Feeling the pressure from their allies.
The Japanese had no choice. And within three years, the Japanese yen went from ¥239 per dollar to nearly half at ¥128 per dollar. The rapid appreciation of the yen made Japanese goods way more expensive and reduced export demand, softening the overall economy.
This triggered a series of events that would lead to Japan's lost decade. To combat a weakening economy, Japan acted swiftly. They cut interest rates to a record low 2.
5%, the lowest in the world at the time, and opened credit markets, making debt more accessible than ever. The impact was immediate. The already booming economy ballooned almost overnight.
Citizens and companies dope headfirst into stock and real estate speculation. Land values began to skyrocket as cheap, money fueled speculation. Japanese tax laws only added to the fire as ordinary citizens avoid capital gains taxes, while the wealthy sidestepped inheritance taxes, making real estate the perfect investment.
But not just real estate land in particular. No one cared about the buildings. No one cared about the rental income.
All they wanted was the land. The banking system was also out of control with almost no checks and balances. Encouraged by the government to lend endlessly.
Banks handed out loans with little concern for credit quality, using investments as collateral. Investments that were greatly overinflated. And even as asset prices ballooned.
The Bank of Japan hesitated to raise rates, fearing a market cooldown. But by May 1989, there was no choice. Rates climbed from 2.
5% to three, and a quarter, eventually peaking at 6% in August 1990. They sent the market into a shock and panic. But that wasn't all.
The Ministry of Finance imposed restrictions on real estate related loans, triggering a rapid collapse in land prices as buyers could no longer seek debt to fuel their speculation. And by the end of 1990, the Nikkei had lost nearly $1 trillion of value and real estate prices fell by an additional $3 trillion. The sun had set.
The lost decades had just begun. In the aftermath of Japan's 1990 economic crash, the nation faced a once in a generation crisis. What followed were decades of policy missteps, hesitations and missed opportunities that left Japan mired in stagnation.
While other nations recovered from similar crises. Japan's unique set of responses created a system that, by 2024, still struggles with sluggish growth, deflation and an aging population. Now let's break it down.
This timeline maps out five key policies that have shaped Japan's economy over the last three decades, and why it's still stuck in such a terrible spot today. The first is the banking crisis, when Japan's bubble burst in the early 90s. The banking system drowned in bad debt.
In a normal situation, many of these banks would have gone under and the loans would have been written off. But instead of tackling the mountain of non-performing loans head on, the government let banks keep them on their books. This gave rise to zombie banks, technically insolvent institutions kept alive by a refusal to confront the harsh reality of insolvency.
For nearly a decade, the zombie banks continued to lend to unprofitable businesses, avoiding restructuring and dragging the economy into a cycle of inefficiency and delay. The government was painfully slow to act. Although the crisis began in the early 90s, it wasn't until 1999 that public funds were finally injected into the banks to stabilize them.
But by then the damage was done. Bad loans had piled up to the point where non-performing loans represented nearly 10% of GDP. Even after the bailout, banks continued propping up failing firms instead of letting them collapse and letting the market properly and efficiently reallocate capital.
Many of Japan's largest banks were teetering on the edge of insolvency, suffocating innovation and economic recovery. The failure to properly restructure the banking sector meant the crisis dragged on for years, and by 2002, NPLs still hovered above $400 billion, blocking any chance for real recovery to take hold. In addition to their poor banking policy, their fiscal policy left much to be desired.
The government rolled out stimulus packages to jumpstart the economy, but they were consistently underwhelming. Between 1992 and 1997, Japan spent just 4. 5% of its GDP on fiscal stimulus, a modest amount given the scale of the crisis.
Worse, much of the spending was neutralized by tax hikes or budget cuts elsewhere, leaving little real impact. Then came 1997, just as recovery signs began to appear. The government raised the consumption tax from 3 to 5%.
The move shattered consumer confidence, slashing spending and plunging the economy back into a recession. The results were bleak. Japan's GDP growth during the 90s averaged a mere 1.
4% annually, nowhere near enough to heal the wounds of the bubble. At the same time, the government allocated large sums into public works projects, but most of it missed the mark. The focus was on rural infrastructure, much of which did little to drive actual economic impact.
These projects often served political interests rather than boosting productivity or fostering long term recovery. Meanwhile, urban areas, the true engines of economic activity received minimal investment. The spending was intended to create jobs and stimulate the economy, but poor targeting turned it into wasteful use of resources.
By 1995, the Bank of Japan had slashed interest rates to zero, hitting the limit of traditional monetary policy. This led to a liquidity trap where further rate cuts had no effect. Despite cutting rates to nearly zero, the Bank of Japan was cornered.
Deflation persisted, with consumer prices falling for much of the 90s and 2000. And when the Bank of Japan finally introduced quantitative easing in 2001, the economy had already been trapped in a deflationary spiral for over a decade. In addition to Japan's terrible monetary policy, at the center of Japan's economic stagnation was its outdated corporate system, the so-called Iron Triangle.
A cozy alliance between banks, businesses and regulators kept failing companies alive with cheap loans instead of forcing them to innovate or shut down. This crony capitalism crushed competition and stunted productivity. In the 90s and 2000, Japan's productivity growth averaged just 1.
2% a year. Compare that to the US and Europe, where it's closer to 2 to 3% a year. Japan's corporate giants, slow, outdated and unwilling to adapt, became deadweight on the economy.
Even manufacturing and tech industries built to compete globally were slow to change. Japan's refusal to embrace innovation or let businesses fail created a corporate culture stuck in the past, unable to compete on a modern global stage. Even now, Japan's corporate culture is known the world over to be one of the most regressive and old school a culture that values face time, long hours and subordination over innovation and productivity.
It doesn't matter if you do things efficiently or effectively. What matters is where you sit on the totem pole and how things have been done for decades before. This cultural stagnation also links to the fifth problem immigration policy.
Japan's homogenous culture has made it very difficult for Japanese citizens to embrace any form of immigration. While other countries brought in foreign workers to combat aging populations. Japan doubled down on keeping its borders closed.
A costly mistake as its workforce has been shrinking. Since 1995, Japan's working age population has declined by more than 10%. Fast forward to 2024, and over a quarter of the population is over 65, leaving the country grappling with one of the world's most severe demographic crises.
This lack of immigration fueled labor shortages and capped Japan's economic potential, combined with rigid labor markets and limited mobility. It's become nearly impossible for younger workers to break into a high demand sector. The result is stagnant economy, starved of the dynamism and fresh talent it desperately needs.
But the problem is Japan has made very few inroads and efforts at all in improving the working culture. Individuals still work longer hours than most places on Earth, and fewer and fewer young people are choosing to have kids in lieu of immigration. There is no solution to this.
Now, the story of Japan is a warning to bloated economies around the world. We're looking at you, Canada and Australia. The market value of Japanese stocks is at the same level it was 40 years ago.
Wages haven't moved. Innovation has been limited and the population continues to decline. There is no single first world country on Earth with a greater combination of economic challenges and mistakes than Japan.
After decades of remarkable growth leading up to 1989, the government's missteps have paved the way for decades of stagnation and economic fallout. They got drunk on the idea of low interest rates and aggressive lending devoid of fundamentals. They believed that unproductive land was the greatest investment anyone could make.
Maintaining low taxes on property while increasing taxes on everything else. They thought the government could window shop its way to allocating capital efficiently. Instead of encouraging R&D investment by ambitious entrepreneurs, they refused to let their businesses fail and penalize the citizens of Japan.
Instead, to prop up the ruling class whose businesses dominate the Japanese landscape. And finally, they forgot that doing the same thing over and over again and expecting different results is the definition of insanity. Put simply, Debt is not free land is not a real investment.
The government is not omniscient. Innovation is a foundation of growth. All businesses need to fail.
And Japan needs to wake up. Open your window and let the sun rise. Thank you for watching.
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