Japan in the 1980s – seven crazy facts about the bubble period
Although it has now slipped into an almost completely forgotten part of the recent past, Japan in the late 1980s was home to the single largest economic bubble in world history, that created a fabulous, almost unbelievable amount of wealth in this small island country. It was a heady, tempestuous time, when a country that was 10 years previous just a scrappy low-wage upstart, the Prime Minister of Japan once flippantly dismissed as a transistor salesman, when that same country turned into an economic and technological superpower, forecast to take over the entire world in short order.
Even here in Japan, the reversal of fortune since the late 80s has been so great, so total, that the bubble period doesn’t seem real, and has been mostly forgotten as a kind of fevered dream that couldn’t have actually happened. Japanese in general don’t really pay too much attention to the recent past, preferring to focus on samurai, Nobunaga, Hideyoshi, and courtesans of the Edo Period in countless NHK dramas that never seem to bore their viewers. There are no Spotify playlists of the top 100 Japanese songs of 1987 or 1997, old movies and TV programs are forgotten and neglected to the point of molding up, and we have what can be said to be a sort of 25 year rolling amnesia.
But let’s take a stroll down memory lane, and look back at the period from 1986 to 1990, when Japan was on a roll, and a very different place from what it was before and what it would become after.
First, a little background: our story goes back to at least 1945, when Japan was a country devastated by war, suffering a total defeat and occupation. Much like Germany, with a different setting and details of course, Japan rebuilt itself over the following decades, to the point where by 1970 it was the 3rd largest economy in the world after the USA and Soviet Union, and into the 1980s as it rapidly increased its share of foreign export markets, primarily but not only in the USA and Western Europe. Japanese cars went from cheap little imports to a mortal threat to the American automobile industry, Japanese electronics were steadily pushing American and European competitors out of business, and more worrying still, the Japanese seemed relentlessly focused on going up the technological ladder, where by 1985 there was a real fear that they would own next generation computing, chip manufacture, and robotics, among other sectors.
A lot of this progress was viewed as inherently unfair by policymakers, businessmen and academics in the USA and Europe. Unfair because Japan was thought to pursue an almost war-like winner-take-all mercantilist model, and also unfair because Japanese people just worked too hard, much harder than spoiled Westerners could realistically be expected to work. America was by far the leading country in what was then called the Free World (the non-Communist block), and the Reagan administration orchestrated something called the Plaza Accord in 1985, which was an agreement between the USA, Japan, West Germany, France and the UK to act in concert to drive up the value of the yen and W German mark, reduce Japanese and German trade surpluses, and help American trade competitiveness. The accord worked in the sense that the dollar depreciated about 50% relative the yen and mark by the end of 1987.
The steep increase in the yen put huge pressure on Japanese exporters, and led to a short recession in Japan from 1985-1986 called the Endaka Recession. The Japanese government grew alarmed and intervened with an expansionist monetary policy, cutting interest rates sharply in an effort to stem the yen appreciation and stimulate domestic Japanese demand. The interest rate cuts succeeded, too much so looking back, and created a domestic economic boom, fueled by cheap money, and abetted by recent deregulation in the Japanese financial markets. First came a property boom, with residential and especially commercial real estate prices going through the roof in the largest Japanese cities, and especially in Tokyo. That was quickly followed by a corresponding stock market boom, with the market more than tripling over the next 5 years, often backed by increasingly expensive real estate as collateral.
Every bubble needs a story that seems plausible at the time, a “this time is different” narrative that justifies everything. In Japan in the mid to late 80s, the story was of economic concentration in Tokyo, leading to a shortage of commercial real estate, seemingly justifying the higher real estate prices, and then in the latter stages of the bubble, a story of Japanese economic exceptionalism. Instead of buckling under the higher yen, Japanese companies would go relentlessly up the technology ladder, entering and then dominating one industry after another with rational long-term planning and heavy investment against Western companies obsessed only with the short term. The strong yen, instead of an impediment, would allow Japanese companies and investors to buy up foreign assets and intellectual property on the cheap, further strengthening their position.
For the length of the bubble, and even for some years after, the story seemed plausible. Japanese companies like Sony and Toyota went from strength to strength in the late 80s, buying American movie studios, moving into luxury cars, making enormous R&D investments, etc.
By the late bubble, in 1989, things were entering a vertiginous stage:
9 out of the world’s 10 largest banks were Japanese
The Japanese position in the world’s financial system was thought to be approaching dominance. In 1989, Japanese banks supplied 20% of the credit in California. Nomura Securities was said to have enough capital to simply purchase all of the leading Wall Street investment banks. Japanese households saved an average of 17% of their income, vs less than 5% in the USA. The Japanese Postal Service, in effect an enormous government bank, had assets greater than the 12 largest American banks combined.
Half of the world’s stock market capitalization traded on the Tokyo Stock Exchange
The NY Stock Exchange held another 25% of the world’s total, and the Osaka Stock Exchange pushed the London Stock Exchange to 4th place.
The Greater Tokyo area had a GDP larger than that of the entire UK
The Tokyo metropolitan area had a nominal GDP of US$730 billion, which would make it the world’s 5th or 6th largest economy (depending on how you would calculate the GDP of the then rapidly declining Soviet Union), and multiple times larger than the total GDP of China at the time.
The grounds of the Tokyo Imperial Palace were calculated to be worth more than all the land in the entire state of California
The Tokyo Imperial Palace, sitting on 1.15 square km of land in central Tokyo, was estimated to have a value greater than all the land in California, America’s wealthiest and most populous state, with an area of 423,970 square km. Despite Japan occupying the equivalent of only 4% of America’s land area, the Japanese property market was worth approximately 4 times more than the American property market.
Golf club memberships in Japan became a tradable commodity with a total value estimated at US$200 billion
Japanese executives had long been famous for their love of golf, and in the late 80s, a single individual membership in Japan’s most expensive golf courses could cost US$3.7 million, more than the value of entire golf courses in other countries. A Nikkei Golf Club Membership Index was created to measure the value of this tradable asset, and at its peak, the total value of golf club memberships was estimated to be US$200 billion, greater than the total Taiwanese GDP and nearly equal to the South Korean GDP of the time.
The annual turnover of the Pachinko (pinball) industry in Japan exceeded the South Korean GDP
Pachinko parlors, stocked with an innocuous seeming Japanese pinball or slot machine game, and which were largely owned by people of Korean descent in Japan, had wide popularity during the 1980s through the 90s, and an annual revenue larger than the entire South Korean GDP until the early 1990s.
Japanese investors owned 45% of prime real estate in downtown Los Angeles
During the late 1980s, Japan became the largest foreign investor in the USA, and the largest creditor nation on earth. Famous for buying Columbia Pictures (which became Sony Pictures), Pebble Beach Golf Course, and Rockefeller Center in NYC, there was talk of a new economic Pearl Harbor in the USA. Japan replaced the USA as the world’s largest creditor, with US$2 trillion in foreign assets and US$623 billion in foreign securities by 1991.
The bubble finally burst in 1990, first with the stock market declining, and then with real estate prices following suit. By 2004, prime “A” commercial real estate prices in Tokyo had declined to literally less than 1% of their peak value, and Tokyo residential real estate prices declined to less than 10% of their peak. The economic situation was not nearly as bleak as those numbers would suggest, however. Japanese banks papered over their losses, kept insolvent companies afloat for years, and the Japanese government embarked on an enormous infrastructure spending program. These actions kept GDP from declining very much, but also extended the length of Japan’s malaise into a “Lost Decade”.
The ”this time is different” story in late 1980s Japan proved no more correct than in other bubbles. The higher yen triggered by the Plaza Accord in 1985 became a permanent feature of the Japanese economy for many years to come. In fact, the yen remained so strong that it was actually 1995 when Japan had its nominal GDP peak vs the USA, reaching 75% of total American GDP that year with less than half the population and a tiny fraction of the American land area and natural resource base.
The strong yen made for a great time shopping and vacationing abroad, or buying huge amounts of Western luxury products in Japan (Japanese consumers in the 1990s accounted for approximately 40% of the world’s luxury brand sales), but it also severely handicapped Japanese industry in competition with South Korean, Taiwanese, and eventually Chinese competitors. Instead of taking over global markets from Europe and the USA, Japanese companies steadily ceded market share to South Korean and other Asian competitors, and largely missed out on first the Internet and then the smartphone revolutions. Heavy debt loads that took too long to purge, and long institutional memories of bad investments kept Japanese companies from investing enough in plant, equipment, and new technologies (which they themselves had often invented) to create economies of scale against their new Asian competitors.
This is not to say that Japan in 2020 is not a wealthy, comfortable, and eminently civilized country. Crime is low, cities are clean, infrastructure is excellent, and incomes are still comfortably at developed country levels. Japanese are still renowned for their world class customer service, attention to detail, and quality products. But it is worth pausing and remembering a time not that long ago, when best sellers were titled “Japan as Number 1”, and for a short time at least, in Japan the future had no bounds.