Japan's bubble bursts

Japan's bubble bursts

“After the 1985 Plaza Accord, cheap money drove Japanese shares and land to giddy heights; the Nikkei peaked on 29 December 1989, the bubble burst in 1990, and failing banks left Japan with a 'lost decade'.”

In the second half of the 1980s Japan went through one of the largest asset bubbles in modern history. It began with the Plaza Accord of 22 September 1985, when the five leading industrial economies agreed to push the dollar down. The yen almost doubled in value, Japanese exporters suffered, and the Bank of Japan, also under international pressure to boost demand at home, cut its discount rate five times, to 2.5 percent by February 1987, and then kept it there for more than two years. Cheap money, newly freed financial markets and a spreading belief that prices could only go up did the rest. The Nikkei 225 share index tripled from its level at the Plaza to a record close of 38,915.87 on 29 December 1989, and commercial land in the six largest cities became almost four times as expensive as in 1985.

The bank began to raise rates in May 1989. Its new governor, Yasushi Mieno, who took office on 17 December 1989, went on raising them until the rate reached 6 percent in August 1990, while the Ministry of Finance told the banks in March 1990 to limit their lending for property. Shares fell first. By 1 October 1990 the Nikkei had lost almost half its value, and in August 1992 it stood 63 percent below the peak. Land prices turned in 1990 and 1991 and then fell, year after year, for more than a decade.

Japanese banks had lent heavily against land, and as its value fell, their bad loans grew. For years the authorities hoped that prices would recover, and they waited. Small lenders failed from 1991, two Tokyo credit cooperatives in December 1994 and Hyogo Bank in 1995; in 1996 public money was used for the first time, to close the failed housing-loan companies, the jusen. Then, in November 1997, Sanyo Securities, Hokkaido Takushoku Bank, Yamaichi Securities and Tokuyo City Bank collapsed within a few weeks. In 1998 Japan set aside 60 trillion yen of public funds and nationalised two of its biggest banks, the Long-Term Credit Bank on 23 October and the Nippon Credit Bank on 13 December. From 1992 to March 2000 the bad loans cost 86 trillion yen, about 17 percent of a year's national output.

The bust left Japan with its 'lost decade', later 'lost decades': weak growth, prices that fell from 1995, and interest rates close to zero from 1995 on. Japan became the great case study of an economy whose central bank has cut rates almost to zero and still faces falling prices; in 2002 the US Federal Reserve's economists drew lessons from it for America. Economists still argue about the causes. Some blame the Plaza Accord, but others, such as Jeffrey Frankel, note that the bubble years came between the strong yen and the slump. The Bank of Japan's own economists concluded that money stayed too easy for too long, that the tightening came late, and that central banks must watch asset prices and lending, not only consumer prices.

The story still matters because it showed how a bubble in shares and land can damage an economy for many years after it bursts, above all when banks carry hidden losses and the clean-up is put off; the Bank of Japan's crisis managers later wrote that its lessons were not unique to Japan. The Nikkei did not close above its 1989 peak again until 22 February 2024, more than 34 years later.

What happened

  1. 1985

  2. At the Plaza Hotel in New York, the finance ministers and central bank governors of France, West Germany, Japan, Britain and the United States agree that 'some further orderly appreciation of the main non-dollar currencies against the dollar is desirable'; Japan promises to run its monetary policy 'with due attention to the yen rate'.

    The Plaza Hotel, Fifth Avenue, New York: the five ministers and central bankers agreed here on 22 September 1985 to push the dollar down

  3. On the first trading day after the Plaza, the dollar falls in New York from 240.10 yen to 231.90; by the end of October it buys 211.55 yen.

  4. 1986

  5. To fight the slump brought by the strong yen, the Bank of Japan cuts its discount rate from 5 to 4.5 percent, the first of five cuts in thirteen months.

    Bank of Japan head office, Nihonbashi, Tokyo: the rate cuts of 1986–87, the rises of 1989–90 and the emergency loans of 1997–98

  6. The rate falls to 3 percent as Finance Minister Kiichi Miyazawa and Treasury Secretary James Baker publish a joint statement on exchange-rate stability.

    Bank of Japan head office, Nihonbashi, Tokyo: the rate cuts of 1986–87, the rises of 1989–90 and the emergency loans of 1997–98
  7. 1987

  8. A fifth cut takes the discount rate to 2.5 percent, the lowest yet, the day after the Louvre Accord in Paris; it will stay there for two years and three months, until May 1989.

    Bank of Japan head office, Nihonbashi, Tokyo: the rate cuts of 1986–87, the rises of 1989–90 and the emergency loans of 1997–98

  9. At the end of August the Bank of Japan starts to guide market interest rates upward, the first step away from easy money.

  10. The day after Black Monday in New York, the Nikkei falls 14.9 percent, from 25,746.56 to 21,910.08. The Bank of Japan drops its plan to tighten, and short-term rates fall again.

    Tokyo Stock Exchange, Kabutochō: the Nikkei closed at its record 38,915.87 on 29 December 1989
  11. 1989

  12. Emperor Hirohito dies in Tokyo. Chief Cabinet Secretary Keizo Obuchi holds up the name of the new era, Heisei.

  13. Prime Minister Noboru Takeshita's government introduces a 3 percent consumption tax; worry about the new tax is one reason the Bank of Japan waits to raise rates.

  14. The Bank of Japan finally raises its discount rate, from 2.5 to 3.25 percent, calling it a preventive measure against inflation, and asks banks for more disciplined lending.

    Bank of Japan head office, Nihonbashi, Tokyo: the rate cuts of 1986–87, the rises of 1989–90 and the emergency loans of 1997–98

  15. A second rise, to 3.75 percent.

    Bank of Japan head office, Nihonbashi, Tokyo: the rate cuts of 1986–87, the rises of 1989–90 and the emergency loans of 1997–98

  16. Yasushi Mieno becomes the 26th Governor of the Bank of Japan, succeeding Satoshi Sumita.

    Bank of Japan head office, Nihonbashi, Tokyo: the rate cuts of 1986–87, the rises of 1989–90 and the emergency loans of 1997–98

  17. Eight days into Mieno's term the discount rate rises again, to 4.25 percent.

    Bank of Japan head office, Nihonbashi, Tokyo: the rate cuts of 1986–87, the rises of 1989–90 and the emergency loans of 1997–98

  18. On the last trading day of the year the Nikkei 225 closes at 38,915.87, its all-time high for the next 34 years and three times its level at the time of the Plaza Accord.

    Tokyo Stock Exchange, Kabutochō: the Nikkei closed at its record 38,915.87 on 29 December 1989
  19. 1990

  20. The Ministry of Finance begins to regulate the total of bank lending and the loans to three industries: property, construction and non-bank finance companies.

    Ministry of Finance, Kasumigaseki, Tokyo: its March 1990 order capped bank lending for property

  21. The Bank of Japan raises its rate by a full point, to 5.25 percent.

    Bank of Japan head office, Nihonbashi, Tokyo: the rate cuts of 1986–87, the rises of 1989–90 and the emergency loans of 1997–98

  22. The Nikkei closes at 28,002.07, 28 percent below its peak of three months before.

    Tokyo Stock Exchange, Kabutochō: the Nikkei closed at its record 38,915.87 on 29 December 1989

  23. At Christie's in New York the paper magnate Ryoei Saito buys Van Gogh's Portrait of Dr Gachet for $82.5 million, a world record for a painting at auction.

  24. After Iraq's invasion of Kuwait raises oil prices, the Bank of Japan makes its fifth and last rise, to 6 percent.

    Bank of Japan head office, Nihonbashi, Tokyo: the rate cuts of 1986–87, the rises of 1989–90 and the emergency loans of 1997–98

  25. The urban land price index for commercial land in the six largest cities reaches its peak, almost four times its level of September 1985.

  26. The Nikkei closes at 20,221.86: in nine months it has lost 48 percent.

    Tokyo Stock Exchange, Kabutochō: the Nikkei closed at its record 38,915.87 on 29 December 1989
  27. 1991

  28. The economic expansion that began in November 1986 reaches its peak, after 51 months.

  29. Toho Sogo Bank fails, the first case in which the Deposit Insurance Corporation gives financial help.

  30. The Bank of Japan cuts its rate for the first time since 1987, to 5.5 percent; more cuts follow in November and December.

    Bank of Japan head office, Nihonbashi, Tokyo: the rate cuts of 1986–87, the rises of 1989–90 and the emergency loans of 1997–98
  31. 1992

  32. The Nikkei falls to 14,309.41, 63 percent below its peak.

    Tokyo Stock Exchange, Kabutochō: the Nikkei closed at its record 38,915.87 on 29 December 1989
  33. 1994

  34. Governor Mieno says in a speech that 'it is not the business of the central bank to save all financial institutions from failure'.

    Bank of Japan head office, Nihonbashi, Tokyo: the rate cuts of 1986–87, the rises of 1989–90 and the emergency loans of 1997–98

  35. Two Tokyo credit cooperatives, Tokyo Kyowa and Anzen, fail, with 210 billion yen of deposits; the authorities avoid a payoff for fear of runs elsewhere.

  36. 1995

  37. The Great Hanshin earthquake strikes Kobe; with a new jump in the yen and another slump in shares, it puts the weak recovery at risk.

    Higashinada, Kobe: the earthquake of 17 January 1995 hit a region already weakened by the bust

  38. The discount rate is cut to 1 percent.

    Bank of Japan head office, Nihonbashi, Tokyo: the rate cuts of 1986–87, the rises of 1989–90 and the emergency loans of 1997–98

  39. Cosmo Credit Cooperative in Tokyo is ordered to suspend operations.

  40. Kizu Credit Cooperative is ordered to suspend operations and the rescue of Hyogo Bank in Kobe is announced: two failures in western Japan.

  41. Daiwa Bank announces a loss of about $1.1 billion from a trader's hidden dealings at its New York branch.

  42. The discount rate is cut to 0.5 percent; the call rate stays there until it falls almost to zero in 1999.

    Bank of Japan head office, Nihonbashi, Tokyo: the rate cuts of 1986–87, the rises of 1989–90 and the emergency loans of 1997–98

  43. US regulators order Daiwa Bank to end all its US operations within 90 days, because its managers hid the losses from them; Japan's banking problem becomes an international one.

  44. The cabinet decides how to close the seven jusen, the housing-loan companies that lent to property developers: their losses are 6.4 trillion yen.

  45. 1996

  46. After a fierce debate the Diet passes the jusen law and three banking laws; 680 billion yen of taxpayers' money covers the last of the jusen losses, the first direct use of public funds.

    National Diet Building, Tokyo: the jusen law of 1996 and the bank rescue laws of 1998

  47. Prime Minister Ryutaro Hashimoto's government announces Japan's 'Big Bang', a reform to free its financial markets by 2001.

  48. 1997

  49. The Nippon Credit Bank announces a restructuring plan, and Hokkaido Takushoku Bank announces a merger with Hokkaido Bank.

    Former head office of Hokkaido Takushoku Bank, Ōdōri Nishi 3-chōme, Sapporo: its failure was announced on 17 November 1997

  50. The consumption tax rises from 3 to 5 percent, and fiscal policy turns tight; the economy slides back into recession as the Asian financial crisis spreads.

  51. Sanyo Securities files for reorganisation and is closed; its default on 8.3 billion yen of call money, the first default in the history of Japan's interbank market, sends shock waves through it.

  52. The failure of Hokkaido Takushoku Bank is announced; Hokuyo Bank takes over its business in Hokkaido, and the Bank of Japan's emergency loans to it reach 2.6 trillion yen.

    Former head office of Hokkaido Takushoku Bank, Ōdōri Nishi 3-chōme, Sapporo: its failure was announced on 17 November 1997

  53. Yamaichi Securities, one of the four great brokers, with 22 trillion yen of client assets, announces it will close after more than 200 billion yen of hidden losses come to light; the Bank of Japan lends 800 billion yen on the next business day alone.

  54. Tokuyo City Bank fails, the fourth collapse of the month.

  55. 1998

  56. The Diet passes two laws that set aside 30 trillion yen of public money for depositors and for the capital of banks.

    National Diet Building, Tokyo: the jusen law of 1996 and the bank rescue laws of 1998

  57. Twenty-one banks receive 1.8 trillion yen of public capital.

  58. The new Financial Supervisory Agency takes over bank supervision from the Ministry of Finance, and the Long-Term Credit Bank announces a plan to merge with Sumitomo Trust as its troubles surface.

    Former head office of the Long-Term Credit Bank of Japan, Uchisaiwaichō, Tokyo: the bank was nationalised on 23 October 1998

  59. Keizo Obuchi succeeds Ryutaro Hashimoto as prime minister.

  60. The Financial Reconstruction Law, which allows the state to nationalise failing banks, comes into force with a second law for capital injections; public funds are doubled to 60 trillion yen.

    National Diet Building, Tokyo: the jusen law of 1996 and the bank rescue laws of 1998

  61. Finance Minister Kiichi Miyazawa meets his G7 colleagues at Blair House in Washington, as the crisis in Japan's banks nears its climax.

  62. The Nikkei closes at 12,879.97, 67 percent below its peak and its lowest since the bubble began.

    Tokyo Stock Exchange, Kabutochō: the Nikkei closed at its record 38,915.87 on 29 December 1989

  63. The Long-Term Credit Bank of Japan, with 26 trillion yen of assets, is nationalised under the new law, having barely survived the summer.

    Former head office of the Long-Term Credit Bank of Japan, Uchisaiwaichō, Tokyo: the bank was nationalised on 23 October 1998

  64. The Nippon Credit Bank is nationalised after an inspection by the new agency finds it insolvent; its shares are judged worthless, wiping out the Bank of Japan's 80 billion yen stake. The new Financial Reconstruction Commission now runs the clean-up.