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Japan in Recent Years, The Economic Bubble and Its Aftermath

banking problem, Japanese investment, Rockefeller Center, Big Bang, emergency measures

In the latter half of the 1980s Japan experienced a period of financial euphoria that came to be known as the bubble. The bubble was triggered in 1985 by a sudden rise in the value of the yen. As Japanese goods became more expensive overseas, Japanís exports decreased and its economy slowed. To stimulate economic growth, the LDP government increased public spending and eased interest rates. Real estate and stock prices soared, and even middle-class Japanese began to speculate. In addition, the high value of the yen encouraged Japanese investment overseas. In Southeast Asia, where labor costs were lower, Japanese companies built new production facilities. In the United States they invested not only in electronics factories and automobile assembly plants but also bought highly visible assets such as Rockefeller Center in New York City. In early 1990, however, the economic bubble burst suddenly when the government raised interest rates to dampen speculation.

The collapse of the bubble ushered in a period of prolonged economic slowdown. Large corporations attempted to deal with the slowdown through downsizing, but many large banks and financial institutions remained saddled with huge amounts of bad loans left over from the economic boom period. In 1997 an economic downturn in Southeast Asia harmed Japanese trade and investment in the region and further undermined the strength of Japanís economy. Public confidence in the economy steadily deteriorated as the economic bureaucracy appeared unable to deal with the countryís economic problems. By the late 1990s Japan remained mired in its longest recession since World War II.

Blame for the continuing economic slowdown was laid at the door of the MOF, which did little despite strong domestic and foreign demands for economic deregulation and greater market freedom. In May 1997 the MOF announced plans for a ďBig BangĒ to deregulate banking and finance, but daily newspaper and television news continued to headline stories about bureaucratic inflexibility, incompetence, and corruption. In 1998 the Diet passed a series of bills intended to initiate economic recovery by increasing government spending and authorizing measures to address the banking problem. By late 2002, however, a decade of massive stimulus packages and emergency measures had failed to stimulate Japanís stagnant economy.

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