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Japan’s Economic Miracle 13

Japan’s Economic Miracle 13

The US trade deficit which had accumulated massively of those days. In particular, the most severe case was a trade conflict between the U.S and Japan. The car import from Japan had increased drastically back then. Therefore, the U.S required Japan to lead strong Japanese ¥ and the financial liberalization.

Implementing the reduction in the official bank rate could make capitals flow into banks easily, and then the amount of funds in markets increased dramatically.

Nevertheless, the States kept putting pressure on Japan to implement it more and more. Therefore, the Bank of Japan got a lot of criticism that it should be avoided.

Yasushi Mieno, the Vice-Governor of the Bank of Japan in those days, talked about the actual situation in an internal document in his lifetime.

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A New Fact

A new fact had come to light. The Governor of the Bank of Japan, Sumida, was convinced by Mieno that the reduction of the official bank rate should not occur.

Mieno thought the sharp appreciation of land price was unrealistic and sort of money game was happening in a lot of markets.

Therefore, he believed that it would be impossible to raise the official bank rate in terms of the domestic economy. However, on October 31 1986, the Governor of the Bank of Japan Sumida declared that implementing the reduction in the official bank rate would help expand and promote domestic demand.

He decided to go ahead with extra reduction in the official bank rate.

On the same day, the top of the Ministry of Finance Miyazawa issued a joint statement with the Secretary of Treasury Baker. Japan and the U.S reached an agreement on the matter of advance in strong yen and the reduction in the official bank rate. That means that the U.S promised to support Japan to suppress the strong currency, but instead Japan would carry out the reduction in the rate. The fact that the reduction in the bank rate would be incorporated into the joint statement was not informed to Mieno.

The Secretary of Treasury Baker

Even though the Ministry of Finance didn’t have a right to decide the reduction in the bank rate, Miyazawa incorporated it into the joint statement. There might have been a meeting between the top of the Ministry of Finance (Miyazawa) and the Governor of the Bank of Japan (Sumida).

The official bank rate was reduced to 3% in November 1986 and to 2.5% in February 1987, which was the lowest level since the end of the second world war. The financing to real estate businesses got spurred more and more and the land price in Tokyo went up sharply.

In addition, it started to happen not only in the capital, but also in suburbs. Actually, directors in the Bank of Japan had already started thinking of a raising the interest rate.

Black Monday

However, just after the argument started, in 1987 October, the Black Monday attacked the N.Y market. The stock price crashed and it brought a domino effect from the U.S to Japan to the world.

Back then everyone in the Bank of Japan felt like the idea of raising the bank rate would cause confusion in the financial market. Therefore, the mood of raising the rate disappeared totally.

After all, the Bank of Japan did not raise the official bank rate for 2 years. In 1989 May, it was raised to 3.25%. Until that day, the bubble began expanding.

On December 29th 1989, the stock price recorded ¥38,885 at the end of the year of the Tokyo stock market. However, this was the end of the high growth economy expanded by the financial liberalization and monetary easing after the Plaza Accord.

January 1990

The last session of the year of the Tokyo stock market in 1989

In January 1990, something unusual started happening in the Tokyo stock market. The stock price changed to declining. Hanwa, which had promoted Zaiteku, made huge loss and the president Kita stepped down. The company aimed to get back to main occupation. However, it took 8 years for it to do so.

In November 1999, Yamaichi spent hours on capturing new customers and the promotion of Nigiri had continued to hide losses. At the end, the company was forced to close the business.

On November 24 1997,  Shohei Nozawa, the president of Japan’s leading brokerage Yamaichi Securities Co., declared bankruptcy during a news conference in Tokyo.

The land price also crashed. This was because the Bank of Japan raised the official bank rate and the regulation of the total amount of financing to real estate businesses was implemented by the Ministry of Finance.

Photo: Fujifotos/AFLO

As a result of this, banks changed their tunes (stopped providing loan services). Azabu Building corp. (president Watanabe whose property expanded to ¥700 billion once before) went bankrupt due to the burst of the economic bubble.

To be continued …

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