The Japanese Bubble Economy

This chapter analyzes the Japanese bubble economy of the late 1980s. From the perspective of global economic history, bubbles come and go. The Japanese bubble economy, however, was one of the largest the world has ever witnessed and was unprecedented in modern history. The chapter then looks at the events that induced and inflated the bubble economy from two perspectives: initial conditions that gave birth to the bubble and factors that accelerated its expansion. Initial conditions consisted of two related factors: exceptionally bullish expectations and an extremely rapid expansion of credit. Once the bubble was formed, its expansion was aided and abetted by three factors: an extended period of accommodative monetary conditions, procyclical interactions between finance and the real economy, and a tax regime prone to accelerating increases in real estate prices. The chapter also discusses the weakness of governance with regard to preventing runaway bubbles. It considers the report on Japanese real estate prices; the argument for amending monetary easing; the Plaza Accord; and the Maekawa Report.