From Miracle to Bubble — Japan, America, and the Plaza Accord

Post-WWII Economic Overview and Japan’s Rise (1945–1970)

Global Economic Context After World War II

As we read in the previous chapters America was by far the manufacturing hub post world war 2. From cars to electronics everythign was built by America.Detroit an American city, today a shadow of its fomrer self was the 5th biggest city in the US, heavily manufacturing-oriented. The decline of Detroit alone shows how far the others came in manufacturing adn how much slower America became in manufacturing.

What was the the world economy like during then?

Bretton Woods (1944): The US acquired much of the world's gold from the 1930s and had the largest reserves of gold in the world. In 1944, the US held over 2,200 tonnes of gold, a significant portion of the world's supply, and was by far the largest gold holder, with France and Germany being the next-largest holders with around 800-900 tonnes each.

This also led to the creation of a fixed exchange-rate system where currencies were pegged to the U.S. dollar, and the dollar itself was convertible into gold at 35 dollars an ounce. This made the dollar the unquestioned global reserve currency.

Marshall Plan (1948–1952): Billions of dollars in U.S. aid financed Europe’s reconstruction. This was to increase the market for American businesses and also to prevent any further wars, as we also saw how desperation can lead to a rise in extreme measures.
Cold War Strategy: To counter the Soviet Union , the U.S. supported allies like Japan and West Germany with both economic and military backing .

Japan, under U.S. occupation (1945–1952), became a major focus of this rebuilding effort. General Douglas MacArthur oversaw reforms in land redistribution, democratization, and the dismantling of zaibatsu conglomerates-(a giant family that controlled the industrials before the world war 2).

Japan’s Post-War Recovery

By 1950, Japan’s economy was still a shadow of its pre-war self. But U.S. financial aid , coupled with access to American markets, laid the foundation for recovery.

The Korean War (1950–1953) became a turning point: Japan served as the logistical and industrial base for U.S. forces, giving its industries a massive jumpstart.

The Japanese government, led by the newly formed Ministry of International Trade and Industry (MITI), made a growth formula:

Export-Led Growth: Begin with textiles, then move into steel, shipbuilding, electronics, and eventually automobiles.
Technology & R&D: Aggressively adopt Western innovations, adapt them, and improve productivity.
Low-Cost Labor & High Savings: A disciplined, relatively cheap workforce and high domestic savings rates financed industrial investment.
Protective Policies: High tariffs and restrictions shielded domestic industries until they could compete globally.

By the 1960s, this formula became known as Japan’s “Economic Miracle.” From 1955 to 1970, GDP growth averaged 10% annually. By 1968, Japan (156.9 billion USD) had already surpassed West Germany to become the world’s second-largest economy, trailing only the United States(946 billion USD).

An undervalued yen under Bretton Woods: fixed at 360 yen per U.S. dollar, Japanese goods were artificially cheap on global markets. This allowed companies like Toyota, Sony, and Mitsubishi to dominate worldwide and also gave a lot of jobs to the Japanese.

In 1968, a study comparing several countries found that Japan also had the lowest youth unemployment rate, with only 2.3% of its teenage labour force unemployed compared to 10 + percent in teh US,Italy and Canada.

The Decline of U.S. Manufacturing Dominance (1960s–1980s)

While Japan was rising, the U.S. manufacturing base was declining:

Rising Competition: By the 1970s, Japan and West Germany had rebuilt and modernised due to American help. Japanese lean production techniques and high-quality goods started outclassing American firms. During the oil shocks of the 1970s (due to the Yom Kippur War in 1973 and the Iranian Revolution in 1979),

Japanese cars — that used far less fuel than american cars gained market share at the expense of Detroit’s gas guzzlers.

Dollar Overvaluation: Even after Nixon ended Bretton Woods in 1971 (“Nixon Shock”), this meant that you coudl not exchange dollar for gold and dollar and godl were not pegged. the dollar often remained strong, making U.S. exports expensive and Japanese imports cheaper.

Social Sentiments:

     Newspapers and TV shows were full of stories about “**the Japanese threat**.”

     Headlines in the 1980s: “**Can America Compete with Japan**?” or “**Rising Sun Over America** 

     U.S. politicians bashed Japan on trade. In Congress, you’d hear things like:
    “**Unfair trade practices**!”
    “**They’re dumping cars and steel on us**!”
     In 1987, U.S. Congressman John Dingell even staged events where Japanese cars were smashed            with sledgehammers to protest imports
      There were even fears of Japan overtaking the US in GDP due to its fast growth.

Domestic Weaknesses: High union wages, rigid management practices, and underinvestment left U.S. firms vulnerable. By 1980, Japan produced 30% of the world’s cars, surpassing the U.S.
Trade Deficits: The U.S. ran ever-larger trade deficits with Japan: $13 billion in 1980, ballooning to $50 billion by 1985. There were massive arguemnts and anger among peope telling Japan does not let Americans do business there but dump all their goods into America.

Meanwhile, Japan surged ahead with just-in-time manufacturing, quality control, and a relentless export push. By the mid-1980s, the “Japan threat” was a daily topic in Washington and Wall Street.

Japan Before the Plaza Accord

By 1985, Japan was the world’s great export powerhouse. The formula was simple: produce at home, ship abroad, reinvest earnings. With the yen at ¥240 to the dollar, Japanese goods were still relatively cheap, and the trade surplus with the U.S. was exploding.

In America, this was politically unsustainable. Detroit was bleeding, American workers were unemployed, and Congress was threatening protectionist tariffs. And there was the sentiment Japan was being the unfair benefitor of American help.

The Plaza Accord (1985)

In September 1985, the G5 finance ministers countries were tired of Japans ultra cheap exports and hence the U.S., Japan, West Germany, France, and the U.K. — met at New York’s Plaza Hotel, which would later be owned by President Donald J Trump in 1988.

Their agreement: intervene in currency markets to devalue the dollar and strengthen the yen and the mark.

The results were dramatic:

The yen doubled in value, from ~¥240/$ in 1985 to ~¥120/$ in 1988.
The U.S. dollar fell sharply against other major currencies.

On paper, this was supposed to revive U.S. exports and slow Japan’s dominance.

The Paradox of Export Revenues

But despite the currency shock, Japanese export revenues in U.S. dollars did not collapse:

1985: $105.9 billion
1986: $116.9 billion
1987: $139.0 billion
1988: $153.9 billion
1989: $166.3 billion

Why?

Sticky Dollar Pricing: Japanese firms kept U.S. sticker prices stable (a Toyota Corolla cost ~$10k before and after Plaza). They absorbed yen losses instead of scaring consumers.
Cost-Cutting & Efficiency: Companies streamlined operations to preserve competitiveness.
Global Demand: U.S. consumers kept buying Japanese goods, despite the yen’s rise.
J-Curve Effect: Trade contracts take years to adjust, so exports remained strong in dollar terms.

In yen terms, however, exporters were hurting badly. $1 of export revenue now translated into half as many yen adn htis meant that teh Japanese started investing more heavily into their own domestic economy due to possible higher returns.

From Export Growth to Domestic Bubble

The yen squeeze forced Japan inward. If profits couldn’t be sustained abroad, growth had to come from home.

BOJ Loosening: To offset the export shock, the Bank of Japan slashed interest rates from 5% (1985) to 2.5% (1987). This would make borrowing easy and stimulate growth in possible higher ROI in Japan.
Credit Surge: Cheap money flooded into banks, which lent aggressively against land as collateral — often on interest-only terms. This meant that you pledeg the land as collateral you pay only the interet rate every year. Since hte land was also going up in value banks would give furhter loans and refinance it when the land value was appreciating.
Speculation: Rising land prices created a feedback loop: more collateral → more loans → higher land prices.

By 1989, the total value of Japanese land was estimated at four times that of the entire United States. In Tokyo’s Ginza district, commercial land reached $300,000 per square meter. The Imperial Palace grounds were said to be worth more than all of California.

Japanese billionaire and real estate mogul who owned the Seibu corporation was listed by Forbes as the wealthiest person in the world during 1987–94.

Could you imagine someone who built real estate being richer than manufacturers and wall street titans? This was also due to the housing bubble.

The Bubble Economy (Late 1980s)

Land Prices: Urban land values rose ~180% between 1985 and 1991.
Stock Market: The Nikkei skyrocketed from ~13,000 in 1985 to nearly 39,000 by December 1989.
Zaitech: Even non-financial corporations shifted into real estate speculation, using financial engineering to boost profits.

The result was an economy seemingly flush with wealth but increasingly detached from fundamentals.

The Burst and the Lost Decades

In 1989–1990, the BOJ, alarmed at overheating, raised interest rates. The cycle snapped:

Land prices collapsed by 50–80% over the 1990s.
The Nikkei lost 60% of its value within three years.
Banks were crippled by non-performing loans.
Japan entered its “Lost Decades” of stagnation and deflation.

The interest rates were also not lowered soon enough like how we saw the fed lower rates immediately after the 2008 housign bubble burst. This meant recovery was a lot slower.

The Plaza Accord’s Role

The Plaza Accord was not the sole cause of the bubble, but it was a critical trigger.

By forcing yen appreciation, it cut off Japan’s export engine and revenus in Yen terms.
There are several reliable statistics from sources like the Bank of Japan (BOJ), Japan Real Estate Institute, and IMF analyses that demonstrate a heavy concentration of investment in land (real estate) during Japan's bubble period.
That liquidity inflated land and stock prices to absurd heights, leading to the bubble and its collapse.

The people lost so much savings taht even today when Japan has negative interest rates they dont spend money. The crisis crushed consumer confidence and hence growth slowed people started spedning less, psychologicla problems etc. The collapse of the stock marekt and home prices feared Japanese parents and the saving mechanism started happenig. People were crushed this also was accelrated becasue the Japanese governemtn was also too slwo to repsnd

In short:

Plaza Accord → strong yen → BOJ easing → credit boom → asset bubble → collapse.

Lessons

Speculative Bubbles: Unchecked leverage and blind faith (“land never falls”) always end in disaster.
Monetary Policy Risks: Policy responses to external shocks can fuel dangerous domestic imbalances.
Global Linkages: The U.S.’s attempt to fix its trade problem in 1985 reshaped Japan’s entire economic trajectory.

Why the U.S. Recovered After 2008 While Japan Stayed Stuck After 1990

Both the Japanese bubble collapse (1990s) and the U.S. financial crisis (2008) started with the same trigger: a sharp fall in land and real estate prices. Both saw banking crises, stock market collapses, collapsing asset wealth, and fears of deflation.

Yet the outcomes were very different. The U.S. returned to growth within a few years, while Japan entered a “Lost Decade” that stretched into two and land prices still has not reached peak 1980s .

WHY?

1. Scale of the Real Estate Shock

Japan (1990s): Land prices collapsed by 70% between 1990 and 2001, erasing trillions of yen in household and corporate wealth. According to the national beuau of economics research Japanese also held around 50 percent of their wealth in land. So this was a devastating loss. Imagine seeing half your life timesavings getting wiped out. This was the
U.S. (2008): Housing prices fell about 33% from the 2006 peak to 2012, painful but far less severe. By the mid-2010s, prices had already rebounded in most major U.S. cities.

Japan lost an entire asset class for a generation; the U.S. suffered a major downturn but not a total wipeout. Even the richest Japanese man Yoshiaki Tsutsumi’s net worth fell down from 20 billion USD in 1987 to 8.5 billion USD in 1994.

2. Household Wealth Structures

Japan: Culturally, households preferred cash and deposits over risky assets. By the 1970s–80s, ~50% of household assets sat in bank or postal savings accounts, with only 5–10% in stocks. Homes were seen as consumption items (depreciating, often torn down after 20–30 years due to building codes), not as appreciating investments. So when land collapsed, households didn’t shift easily into stocks or entrepreneurship. They simply saved more, reinforcing deflation.
U.S.: Households were far more exposed to housing as investment (~25% of wealth) and the stock market (401k retirement accounts, mutual funds). After 2008, many lost home equity, but fiscal and monetary support helped stabilize consumption, and stock markets rebounded quickly. By 2013, S&P 500 was back to pre-crisis levels.

👉 Japanese households hoarded savings post-1990; American households deleveraged but returned to spending.

3. Policy Response

Japan: BOJ raised rates in 1989 to curb speculation, then cut slowly afterward. It wasn’t until 2001 (a decade later) that Japan adopted quantitative easing. Fiscal stimulus came in fragmented, wasteful bursts (bridges to nowhere, white-elephant projects), and was paired with austerity measures that killed momentum.
U.S.: The Federal Reserve slashed rates to zero within months of the crash, launched QE by 2009, and backstopped credit markets immediately. The $831 billion American Recovery and Reinvestment Act (2009) injected money into infrastructure, tax cuts, and social programs. Unemployment peaked at 10% in 2009 but fell steadily thereafter.

Japan was slow, timid, and contradictory; the U.S. moved fast and big.

4. Banking Sector Cleanup

Japan: Banks sat on zombie loans, rolling over credit to insolvent borrowers (“evergreening”). Non-performing loans peaked at ~20% of GDP by the late 1990s. The government hesitated to close banks because of keiretsu ties. Bad debt recognition dragged on for more than a decade.
U.S.: TARP (2008) and the 2009 stress tests forced banks to write down losses quickly. 465 weak banks were shut by 2012. By 2011, U.S. banks had raised capital above Basel III requirements and resumed lending.

Japan’s banking system froze; America’s banking system rebooted.

5. Economic Structure

Japan: Depended heavily on manufacturing and exports (20–25% of GDP). When the yen surged in the 1990s and global demand faltered, Japan couldn’t pivot quickly. Rigid corporate structures (lifetime employment, seniority wages) slowed adjustment.
U.S.: Far more diverse and flexible. Services (70% of GDP) and technology drove recovery. Companies like Apple, Google, and Amazon exploded post-2008. Bankruptcy laws let GM, Chrysler, and others restructure fast, emerging leaner.

Japan was locked into an export-industrial model; America shifted growth engines toward services and tech.

6. Demographics

Japan (1990s): Aging population (median age 43 by 1995, rising since). Workforce started shrinking, dragging down consumption and tax revenues. Savings rates actually rose after the crash, deepening deflation.
U.S. (2008): Median age was just 37, with immigration and higher birthrates supporting a growing workforce. Consumer spending (70% of GDP) bounced back by 2011, supported by mortgage relief and deleveraging.
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Japan aged into stagnation; the U.S. grew younger and more dynamic.
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7. Global Context

Japan: Faced a rising yen, sluggish global demand, and weak domestic policy credibility. Instead of investing in high-growth industries (like IT), capital was stuck in unproductive sectors and zombie firms.
U.S.: Benefited from being the issuer of the world’s reserve currency. Global capital flooded into Treasuries, letting the U.S. borrow cheaply to fund stimulus. At the same time, China’s huge 2008 stimulus boosted demand for U.S. exports.
```
The dollar’s reserve role cushioned the U.S.; the yen’s appreciation squeezed Japan.
```

Other more researchy reasons Land Taxation and Speculation

Some argue that the land tax was a reason for the bubble of Japan also. Japan’s real estate tax burden was tiny compared to peers. Only 1.7% of national income vs. 3.5% in the U.S., 2.9% in the UK, and 1.8% in France.In the U.S., property taxes are a major ongoing cost of ownership, discouraging speculation though this was challenged in 2008 recession. In Japan, holding land was cheap — fixed property taxes were based on outdated low appraisals, and agricultural/greenbelt land was taxed especially lightly.Result: it was more profitable to sit on idle land waiting for appreciation than to use it productively. Somtimes even Land without buildings often sells for more than land with buildings.

2. Linkage Between Land Prices and Share Prices

Land prices (yellow) and the Nikkei stock index (red) surged together from 1985–1990.
Why? Because companies held lots of land on their balance sheets. As land was “revalued” upward, investors assumed company net worth rose too → stock prices climbed.
Banks, under BIS rules, could even count unrealised stock profits as capital. This meant higher share prices = more “capital” = more lending power → which was ploughed back into land and shares.
A self-reinforcing feedback loop: land up → stocks up → more lending → land up again.

The growth in revenues and assets was not just from fundamentals, which again showed unsustainability in their continuous rise.

3. Housing Affordability and Social Impact

By the late 1980s, the average cost of a home in metropolitan Japan was 7–9 times annual household income — far beyond affordability.
In Tokyo, less than half of units were owner-occupied; many households simply gave up on homeownership.
This created sharp wealth inequality between landowners and non-owners. If your family already owned land, you were rich; if not, you were locked out.
Foreign firms also struggled — sky-high land costs made it nearly impossible to establish businesses in Japan.

This meant if people aren't able to start a business or buy a house, the prices were unsustainable

. Distribution of Net Worth by Income (Table 4.3)

Households are sorted by annual income brackets.
Homeownership rises sharply with income:
- Low-income (< ¥2m) → ~65% own homes.
- Upper-income (¥8m–10m+) → >90% own homes.
Net worth concentration:
- Lower-income households mostly hold < ¥10m net worth.
- By contrast, high-income households disproportionately hold wealth above ¥50m.
Inequality signal:

The overall Gini coefficient for net worth is 0.52 (fairly high).
This is driven heavily by the unequal distribution of real assets (land, property).

Residential Land dominates wealth: ~55% of all household net worth sat in residential land (1984).
Home buildings only ~18%, meaning Japanese treated houses as depreciating structures (not stores of value).
Rental property tiny (~1–2%) — very concentrated, with a high Gini (0.97). Only a small minority of households owned rentable assets.
Consumer durables (cars, appliances) were evenly spread (Gini ~0.27), showing near-universal ownership but little wealth value.
Monetary assets (cash, deposits) were also significant (~24%), but unequally distributed (Gini ~0.54).
Liabilities concentrated: younger or poorer families carried debt, often for housing loans. For 22% of households, net monetary assets were negative.

. Gini Coefficients (Inequality by Asset Class)

Land (0.55): Unequal, but widely held enough to anchor wealth distribution.
Housing (0.62): More unequal than land, since home value varied by location.
Rental property (0.97): Extreme inequality — a tiny minority held income-producing property.
Monetary assets (0.54 gross; >1 net): Because many households had negative net savings (debts > deposits).
Consumer durables (0.27): Very equal, but low-value assets.

Inequality was rooted in land + finance, not in day-to-day goods. Owning land = wealthy; renting or debt-heavy = vulnerable.

Social Implications

By the mid-1980s, land = wealth in Japan.
If your family owned land (especially in cities), you rode the bubble up.
If not, you were stuck: homeownership affordability ratios reached 7–9x income, locking many younger families out.
This created generational and class divides, with landowners growing rich on paper, while renters faced higher costs and no wealth accumulation.

Why This Mattered for the Bubble

Because household portfolios were undiversified and land-heavy, when land prices collapsed:
- Household wealth was directly destroyed (70%+ fall in land values).
- Banks’ collateral evaporated (since most loans were land-backed).
- Inequality widened further — those who had leveraged into land lost everything, those who hadn’t remained stuck renting.
Unlike in the U.S. (2008), where financial assets and pensions softened the blow, in Japan the collapse of land = collapse of wealth systemwide.

Unfair treatment towards business individuals

The collapse of the bubble was not just financial, but cultural. Japan’s corporate system prized stability, conformity, and the keiretsu web of insider ties over bold entrepreneurship. Scandals involving high-profile figures reinforced this risk aversion. Yoshiaki Tsutsumi, once the richest man in the world and controller of Seibu, was arrested in 2005 for securities fraud after his empire crumbled. Carlos Ghosn, the outsider who rescued Nissan, was arrested in 2018 and held for months under Japan’s “hostage justice” system, where suspects are isolated and pressured to confess. Takafumi Horie, a brash internet entrepreneur once dubbed the “Japanese Zuckerberg,” was jailed in 2006 for securities fraud — an unusually harsh 2.5-year sentence compared to the suspended terms most white-collar offenders receive.

These cases weren’t isolated — post-bubble, Japan saw a surge in white-collar prosecutions, often accompanied by draconian detention tactics. Unlike the U.S., where failure is often seen as resilience (Musk nearly bankrupted Tesla and came back stronger),

Failure was seen as unacceptable also this was also the reason the Japanese were too slow to lower the interest rates, and entrepreneurship died down.

We have also seen that Japan's billionaire list is dominated by inheritors (e.g., from 1980s land/stock empires) or steady-growthers (retail/tech families), not fresh disruptors. Vs. Germany(a country of similar size ) (more self-made via engineering/VC), Japan's "new" entries are rare and modest—proof of low startup dynamism. From 2010–2024, Japan added ~15–20 net billionaires (slow growth), while Germany added ~40–50, often via tech unicorns

“The number of new billionaires emerging in the U.S. is far higher than in countries like Japan, reflecting both cultural and economic differences. In America, entrepreneurship and risk-taking are celebrated, and this encourages people to launch ventures. The result is not only more billionaires, but also more jobs and innovation, as bold risks translate into new companies that employ millions.”

All of these factors contributed to the bubble and slowed down recovery, ultimately

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