Main reason of Japan’s bubble economy of 1980: low level of independence.
Its loose monetary policy stimulated a rapid increase in price of land and stocks.
Appreciation of the yen and depreciation of the dollar.
Popular opinion: the dependent Japanese central bank caused the bubble
Argument: Bank of Japan was independent from the prime minister and ministry of finance and
loosened monetary policy.
Yoshikawa: recession of the 1 half caused by stock adjustment and reduction of investment du to
bubble, 2 half caused by reduction of investment as a result of tighter bank lending and finance
Bad loans made by the bank
Low level of independence:
• The U.S. asked Japan to expand domestic demand to reduce it huge current account
surplus with the U.S. ▯asked Bank of Japan to loosen monetary policy (Money supply
increased, decrease the value of the Yen and encourage economic growth).
• Result: increase financial liquidity and stimulating a rapid increase in the price of land
• Finance Minister had the final say and could order the Bank to run any policies.
But, the author argues that Japan gained substantial independence since 1975 and could start
running monetary policies as it wishes
Also argues that the loosened monetary policy did not trigger the asset price inflation but
accelerated it (difficult to argue that tightening would have control asset prices).
1. Rising of the prices in the early 1980’s : Why the asset prices went up
Some argues that loose monetary policy triggered the increase of asset price, but it was
already increasing without loosened monetary policy.
Really good recover from the 1987 stock price collapse and business boom.
Because the government wanted to sell more bonds to companies and banks, the Ministry of
Finance permitted them to adopt a different way to account their businesses, which made
them save the corporate income tax, and created the boom of speculative investment on the
stock exchange (more profit generated due to lower tax).
Real estate increase helped also.
Ministry of finance pushed investment companies to purchase shares to counter the stock
exchange collapse, resulting in increase prices.
Land prices increased first in Tokyo in the 1980s (from business to residential districts). Urban Renaissance: government deregulated land utilization, building standars, disposed of
stateowned land, and have largescale development projects. ▯surge in land prices
The land tax system helped the increase in land prices.
2. Monetary Policymaking process from the Plaza Accord to Black Monday.
The process through which monetary policy was formulated ▯didn’t prevent the bubble.
(Lowering the discount rate in 1986 and 1987: autonomously taken by the Bank of Japan or
forced onto the Bank by the Ministry of Finance.
Plaza Accord: appreciate nondollar currencies (including Yen) against the dollar.
October 1985: higher interestrates ▯appreciating the yen against the U.S. dollar, but did not
trigger higher domestic demand for US goods.
Within the Bank, 2 groups:
a. KokunaiHa: focusing on domestic economy and more important than international
economy, insisted in keeping the Japanese Bank independent.
b. KokusaiHa: international affairs focus. Object interest rate hike.
KokunaiHa took the initiative for the rising of shortterm interest rates, to appreciate the Yen
while keeping independence.
The US trade deficit still increased.
Coordinated actions on interest rates with West Germany, Japan and US. Germany cut in
1986 its interest rate.
Then, criticism grew against the appreciation of the Yen, and the policy to raise the yen was
abandoned: intervened in the foreign exchange market by selling yen.
KokunaiHa: started to be antiUS as they forced Japan to reduce interest rates.
US secretary Baker was happy of the supplementary budget of Japan to increased domestic
demand but still wanted lower interest rates.
The new ViceGovernor of the Bank of Japan, Yasushi Mieno, was KokunaiHa: influencing
the decisions, focusing on domestic economy. But still agreed to cut the discount rate to 3%.
US and Japan agreed to stabilize their exchange rates because loose US policy was harming
the foreign investment.
But, Japanese Yen still appreciate and the US trade deficit with Japan increased.
In August 1987, the Japanese Bank increased the shortterm interest rates.
In September 1987, the US raised interest rates. Result: depreciation of the US dollar.
US secretary Baker resented and states that the U.S. tolerated a weaker dollar, which pushed
investors to recongnized the failure of the intth ational policy coordination ▯LEADING TO
THE BLACK MONDAY OF OCTOBER 19 1987. Result: Depreciation of the USD, inflated asset prices and bond prices collapsed in US.
Japanese Ministry of Finance blamed the Bank of Japan for Black Monday.
When home currency surges, it is common for the country to loosen monetary policy to deal
with the deflationary effect: Bundesbank did so (the most independent bank in the world).
While the Bank of Japan lowered its official discount rate 5 times, the Bundesbank did so
only 2 times ▯showing that the Bank of Japan was much less independent than the
BundesBanks. But, Japan was getting more influenced by the U.S. than Germany: since more
trade between USJapan than USGermany (making Japan more dependent than Germany on
US trade). Japanese firms were affected by the depreciation of the USD.
Governor Sumita accepted rate reductions, not because influenced by Ministry of Fina