In the late 1980s, Japan's economy
was the envy of the world. The country's meteoric rise to become the
world's second-largest economy coupled with the dominance of Japanese
brands such as Sony, Toyota and Kubota gave rise to the term "Japanese
Economic Miracle."
Managers around the world sought to emulate the nation's
manufacturing techniques. Japanese companies and consumers, enriched by
their nation's rapid economic growth, bought up prime real estate and other assets in the United States, Europe and elsewhere.
But Japan's miracle was built in part on a bubble. In 1989, at the
height of the property bubble, choice commercial property in Tokyo sold
for more than $20,000 per square foot. Average Japanese homes near the
nation's six largest cities cost the equivalent of 30 to 50 times the
median Japanese income, an unsustainable level. Gains in residential and
office properties between 1986 and the top of the property bubble in
1991 were even more dramatic than home price gains in the United States
during the mid-2000s.
The economic miracle came to an abrupt end in 1991 as the nation's overheated real estate market collapsed and the benchmark Nikkei 225 stock Index lost nearly a third of its value in U.S. dollar terms in the 1990s, even as stocks in the United States and Europe saw their biggest gains in decades.
The 20-year hangover
Japan continues to suffer under the hangover of its erstwhile boom. The country has continued to suffer from bouts of deflation
-- a general decline in price across the economy -- driven in part by
declining property prices in parts of the country, even more than 20
years after the bubble burst. Deflation is particularly damaging to the
economy as it discourages credit. When consumers and businesses borrow money they typically post collateral
in the form of assets such as real estate or equipment. But in a
deflationary environment, the value of this collateral is constantly
eroding, making it less valuable as a loan guarantee. (more)
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