Japan’s Lost 30 Years: How bubble was made and popped

1. Introduction

The collapse of the Japanese asset price bubble is not just an event of the past. It is the very root of the challenges Japan faces today—from low growth and an aging population to the recent record-breaking depreciation of the Yen. Today, I want to dive deep into the bubble’s spectacular rise, the tragedy hidden behind it, and the critical moments of policy failure that defined an era.

2. The Beginning of the Bubble: A Mirage Created by the “Endaka” (Strong Yen)

The Plaza Accord of 1985 was the turning point that changed the fate of the Japanese economy. Right before the accord, the exchange rate was approximately 242 yen per dollar. Within just one year, it plummeted to the 150 yen range, ushering in an era of a record-strong yen.

• Episodes of Madness: Flush with excess liquidity, corporations focused more on Zaitech (financial engineering) than their core businesses. It was an era where companies vied for new graduates by sending them on overseas trips or sequestering them in luxury hotels (Naisoku) to prevent competitors from hiring them. Interviewees would receive tens of thousands of yen just for “transportation expenses.”
• The 1.57 Shock and the Prelude to Demographic Crisis: However, this prosperity was a poisoned chalice. As land prices skyrocketed, owning a home in the city became impossible, leading the younger generation to give up on marriage and childbirth. In 1989, at the height of the bubble, the total fertility rate hit 1.57, shocking Japanese society. Known as the “1.57 Shock,” this was effectively the starting point of the demographic cliff Japan faces today.

3. The Collapse: A Preventable Disaster and the Central Bank’s Blunder

The bursting of the bubble was not a natural market correction; it was the result of disastrous miscalculations by policymakers.

① The Misjudgment of Yasushi Mieno, the “Heisei Demon”

In 1989, Yasushi Mieno took office as the Governor of the Bank of Japan. Aiming to crush speculators, he declared, “I will be the fireman putting out the fire of Tokyo’s soaring land prices.” The problem was that Japan’s inflation was actually very low at the time.

[Trends in Japan’s CPI (Inflation) and Interest Rates 1985–1990]

• 1985: 2.0% (Plaza Accord)
• 1987: 0.1% (Near-zero inflation)
• 1988: 0.7%
• 1989: 2.3% (Including the impact of the new 3% consumption tax)
• 1990: 3.1% (Interest rate peak at 6.0%)

Governor Mieno misidentified the temporary price rise caused by the new tax as a sign of severe inflation. Consequently, he hiked interest rates from 2.5% to 6.0% in just 15 months and completely choked off the money supply with “window guidance” (total loan volume regulations). It was akin to treating a patient with a lethal dose of radiation to kill a few cancer cells.

② “Decision Paralysis” and the Birth of the “Lost 30 Years”

Even after the bubble burst, Japan failed to respond swiftly. Unlike the United States, which immediately slashed rates to zero during the 2008 financial crisis, Japan wasted five years (until 1995) to finally lower interest rates to 0.5%. The cost of this hesitation was severe: it birthed the “Employment Ice Age,” produced a legion of zombie companies, and led Japan into a 30-year-long quagmire of stagnation.

4. Lessons for Today: An Inverse Crisis

Having lived in Japan for eight years, I feel that Japanese society is still dominated by a culture of avoiding responsibility—often described by the proverb “Kusai mono ni futa wo suru” (Put a lid on what smells bad).

Interestingly, Japan today is trapped in the exact opposite dilemma of 1990. Back then, they failed by raising rates too fast despite low inflation. Today, they are neglecting the pain of the weak Yen and high prices by adjusting rates too slowly despite rising inflation.

The bureaucratic caution of “not wanting to be the villain” or “avoiding responsibility” failed to prevent the explosion 30 years ago, and today, it is failing to drive necessary change. Just as the reckless rate hikes of 1990 were a blunder, I fear the current sluggish hesitation will also be recorded as another major policy failure for future generations.