ESRI Research Note No.19

Japan's Bubble, Deflation, andLong-term Stagnation—Review of An Oral History Study—
Tomohiro Ishikawa

September 2011

Economic and Social Research InstituteCabinet Office
Tokyo, JapanThe views expressed in “ESRI Research Note” are those of the authors and not those of the Economic andSocial Research Institute, the Cabinet Office, or the Government of Japan.

The views expressed in ESRI Research Note are those of the author(s) and do not necessarily reflect thoseof the Economic and Social Research Institute, Cabinet Office, or the Government of Japan.
ESRI Research Note may contain preliminary results and the contents of the paper may be revised in the
future. Quotation or reproduction of the contents of the paper is prohibited unless otherwise approved by
the Economic and Social Research Institute and the author(s) in advance.
(https://form.cao.go.jp/esri/en_opinion-0002.html)

Japan's Bubble, Deflation, and Long-term Stagnation—Review of An Oral History Study *—Tomohiro Ishikawa
Researcher
Economic and Social Research InstituteCabinet Office, Government of Japan
1. Introduction
The recent Great East Japan Earthquake dealt a heavy blow to the entire Japanese
economy, stalling the process of gradual recovery that had been underway from thepost-Lehman shock global economic and financial crisis. There was of course thehuman and material damage caused by the earthquake, tsunami, and nuclear power
station incident. In addition, automotive and other industries were hit with parts
supply backlogs and other supply chain disruptions, while rolling power cuts forced
temporary cutbacks in and suspension of production, with exports too falling off. At
the moment, Japan has no choice but to focus on restoring the affected areas, repairing
local socioeconomies, and rebuilding lives. However, to ensure that recovery from thedisaster doesn’t stop simply with restoration but rather link it through to sustainedprosperity from a long-term perspective, we need to learn from history and reflect
those lessons in future institutional design and policy management.
In January 2007, the Cabinet Office’s Economic and Social Research Institute (ESRI)
with which I am affiliated, launched a research project entitled “Japan's Bubble,
Deflation, and Long-term Stagnation” (“Bubble/Deflation Research Project”). The
aim of this project was to provide an accurate and evidence-based account of
economic trends and economic policies over the quarter-century of the rise and fall ofJapan’s economic bubble and efforts to combat the ensuing deflation. By closely
examining and evaluating these trends and policies, the project sought to pass onreflections and lessons to succeeding generations as a contribution to future economic
policy management. The results of that research have already been published in an 11volume series bearing the same title as the project. Seven volumes engage in analysis
and evaluation, comprising research papers dealing with specific areas. Threevolumes are dedicated to history, compiling a record of that era. The final volume
covers the four round-table discussions held to garner a bird’s-eye view of the project
as a whole †.
This paper reviews from the author’s perspective the results of the Bubble/Deflation
Research Project with an emphasis on the oral history covered in volume 3 of history,*

I thank Masahiro Hori (visiting research fellow, ESRI) and Susumu Kuwahara (research fellow,
ESRI) for the many comments they contributed during the writing of this paper. ESRI president
Yoshiyasu Ono also noted that it was valuable to know how those involved in the bubble/deflation era
thought, regardless of whether they were right or wrong, and that we must utilize that knowledge andlessons learned to avoid the same mistakes in future. Finally, the views expressed in this paper and any
remaining errors are of course the sole responsibility of the author.
*The English translation of this paper was done by Simul International, Inc. under commission fromESRI.
†
The seven volumes of analysis and evaluation were published by Keio University Press in FY2009,
while the three history volumes and the volume covering the round-table discussions were published by
Saiki Printing Co., Ltd. in FY2010.

1

picking up on particularly interesting points. Volume 3 presents the results of a series
of interviews conducted with politicians, bureaucrats, business managers, and otherparties from the bubble/deflation period by the Oral History Working Group, a
subgroup of the History Research Group. Reflecting the division of labor within the
Working Group, part 1 of volume 3 presents interviews conducted by Professor
Shigeru Matsushima from the Tokyo University of Science Graduate School of
Innovation Studies and Professor Naofumi Nakamura from the University of Tokyo
Institute of Social Science concerning the experiences of bubble/deflation periodbusiness managers and their perception of the times. Part 2 records interviews byProfessor Harukata Takenaka of the National Graduate Institute for Policy Studies
and Yutaka Harada, then-executive director and chief economist at Daiwa Institute of
Research Ltd., with policy officials and finance industry representatives from the
bubble/deflation period, dealing especially with the nonperforming loan issue.
This paper primarily addresses the content of part 2 with its focus on the
nonperforming loan issue, but particularly in the section on lessons drawn from the
bubble/deflation period, the scope of the interview material presented broadens toinclude messages from business managers who successfully rode out the protracted
bubble/deflation period.
To anticipate the content of the paper somewhat, the main messages (or perceptions of
the times) garnered from the excerpts of interviews could be summarized as follows:(a) Factors behind the appearance of the bubble economy included the emergence asof the late 1980s of the myth of permanently low interest rates (prompted byforeign pressure, etc.) and the government policy of expanding domestic demandthrough private sector participation.
(b) Factors behind the collapse of the bubble economy included the introduction ofquantitative restrictions on the extension of real estate–related loans and steep
interest rate hikes.
(c) Factors behind the accumulation of nonperforming loans included an
unexpectedly sharp plunge in land prices, excessive optimism over the disposal of
nonperforming loans, and the way in which examinations of loans secured byland and real estate were effectively crippled.
(d) Lessons from history include the need to pay close attention to asset price trends
and prioritize domestic economic policy over external policy, and that slow
cleanups can exacerbate the situation.
It is a historical constant that people will have different interpretations of events thathave occurred, and that there may in fact not be many areas of consensus.
Nevertheless, taking down directly the diverse perceptions and arguments of thevarious pundits (and parties involved) as a record of the times is in itself highly
significant, and hence that was indeed the editorial policy of the Bubble/Deflation
Research Project. As a result, however, it might be difficult to draw an overall
message with a clear direction just from the content presented in this paper. My own
preference would be to leave that final task to readers. At the same time, having been
involved in putting together the results of the research project, I recognize that themassive amount of highly specialist information presented in the 11-volume series
makes it a little daunting to the general reader. What I have tried to present in thispaper is personal notes summarizing those points from the research results that I as a2

reader found particularly interesting in the hope that it will lead readers into the series
and encourage them to look at individual volumes, even if just those portions which
are of special interest to them.
2. From the Oral History Section of the Bubble/Deflation Research Project
The three history volumes of the Bubble/Deflation Research Project were created withthe aim of describing as factually as possible the state of the Japanese economy sincethe 1980s and the various policies pursued. In particular, the third volume, Nihon
keizai no kiroku—jidai shogenshu [Record of the Japanese Economy—An Oral
History], comprises interviews with those involved in policy and business
management during the bubble/deflation period, and is extremely interesting in termsof understanding what realities and contemporary perceptions actually drove thedecision-making of parties from that era. Here we review that content with aparticular emphasis on the factors behind the emergence and collapse of the bubble
economy that left such a major impact on the Japanese economy. The paper also looks
at the nonperforming loan debacle that triggered the period of economic stagnation
known as the “lost decade” (or indeed two decades?), as well as lessons deriving fromthe experience of the bubble/deflation economy, which was one of the original aimsof the research project.
2.1 Why did the bubble economy occur?
Economic bubbles are said to occur when asset prices diverge from economic
fundamentals, and in the late 1980s, there was certainly a marked rise in land andstock prices. At the same time, because the strong yen and cheap oil were keeping
commodity prices stable, the Bank of Japan (BOJ) retained a historically low interest
rate of 2.5 percent, a policy which is argued to be one cause of Japan’s economic
bubble. Let us start with the views of contemporary players from the Ministry of
Finance (MOF), the BOJ, and elsewhere as to what caused the bubble, the interest rate
question included.
Following the September 1985 Plaza Accord, the yen appreciated more strongly than
expected, precipitating a recession that was met with a succession of interest rate cuts.
When the burgeoning of the US trade deficit in early 1987 again pushed the yen
sharply upward, Japan’s interest rate hit a postwar low of 2.5 percent. In February
1987, the Louvre Accord was signed in an act of policy coordination aimed atstabilizing the dollar. Japan’s low interest rate policy continued from February 1987
through to May 1989 in response to certain external factors (Black Monday, etc.) as
well as the internal factor of stable commodity prices. BOJ and MOF personnel
indicated similar views in regard to the external factors.
Former BOJ executive director Yoshio Suzuki notes that where the Japanese andGerman economies had been picking up as of mid-1987, the Louvre Accord
concluded in February 1987 to redress the excessive dollar depreciation caused by the
September 1985 Plaza Accord made it politically difficult to raise the interest rate,
creating a contradiction between international policy coordination and domestic
policy. According to Suzuki, the BOJ became concerned that the ultra-low 2.5 percent
interest rate (February 1987–May 1989) might lead to economic overheating, so in
December 1987, it coordinated with Germany behind closed doors to raise the official

3

discount rate and used its usual monetary adjustment function to induce a slightly
higher call rate. However, this generated expectations of higher German and Japaneseinterest rates, with investors’ calculation that the rise of both Japanese and Germaninterest rates would again push the dollar down ending in Black Monday (October1987). Measures such as dollar-buying interventions were implemented to close thissituation down, and while this international policy coordination succeeded, it also
created the myth of permanently low interest rates, the logic being that the BOJ would
never be able to raise the interest rate because it would have to wait indefinitely for
the weak dollar to recover, effectively tying down Japan’s interest policy. Banks andreal estate agents then got together to invest in land, sending land prices skyrocketingand triggering the bubble economy [History, Volume 3, p. 561].
Former MOF Banking Bureau councillor Sei Nakai recalls that MOF’s International
Finance Bureau thought that it was incumbent on countries running trade surpluses
and creditor countries to maintain low interest rates (2.5 percent) and supply capital to
the world. What caused the bubble, he believes, is this excessive concern with theissue of external imbalance, as well as keeping the low interest rate in place for solong out of fear that raising it would cause another Black Monday and destroy theinternational equilibrium [p. 261].
MOF officials also suggested that one key factor was the stability of commodity
prices causing the right timing for an interest rate hike to be missed.
Former vice-minister of finance for international affairs Toyoo Gyoten observes thatsome BOJ officials felt that while asset prices might have soared, stable commodity
prices meant that there was no inflation risk. Hence, rather than tightening money inresponse to an extremely overheated situation, low interest rates were retained in
response to the social climate, which could not see why any such tightening wasnecessary and consequently opposed it, and this led to the bubble economy [p. 511].
Nakai too notes that stable commodity prices also contributed to missing the righttiming for an interest rate hike [p. 261].
At that time, Prime Minister Nakasone had instituted domestic demand expansion
policies such as involvement of the private sector and urban redevelopment that were
designed to redress the imbalance in the international balance of payments.
Development projects using private sector participation (development of theoceanfront area in Tokyo Bay, disposing of state-owned land, etc.) may have createdan asset price spiral in that they pushed up speculative land demand, which in turnaffected stock prices. Steeply climbing stock prices then made it easy to procure funds,
further increasing land demand. This scenario would suggest that the stock and land
price bubble was the product of policy decisions.
A private-sector view on this issue was expressed by former Fujita Corporation
executive vice-president Keishi Kawamata. He points out that where a ceiling ofaround 1.25 times the posted price—the top price allowed under the National Land
Use Planning Act—was supposed to have been set for land bought using privatesector capital under the Nakasone administration’s scheme, the sites of the National
Railway Corporation’s Shinagawa East Cargo Yard and the Legal Training andResearch Institute in Kioi-cho, Tokyo, were sold at four times the posted price on the
grounds that public institutions’ land sales were exceptions to that legislation. This4

move, he asserts, was a policy mistake on the part of the government and a catalyst
for the bubble economy [p. 123]. He also suggests that what triggered the rise in land
prices in the 23 wards of Tokyo, and particularly the three central wards, was aforecast by the National Land Agency’s Metropolitan Areas Development Bureau in
May 1985 that office demand in Tokyo would increase to around 5,000 hectares, orthe equivalent of the office space in 250 skyscrapers.
In addition, former member of the House of Representatives Takujiro Hamada
proposes that the government’s protection of banks—the so-called convoy system—
left banks unused to competition and consequently unable to exercise a level ofmoderation. Moreover, the long period of extremely easy money encouraged banks tooverextend themselves in terms of lending and asset purchases. That was what caused
the bubble, and it was at least partially the administration’s fault [p. 414]. Former
Long-Term Credit Bank of Japan (LTCB) executive Noboru Yanai also identifies theextended period of overbanking as a factor in the emergence of the bubble economy.
He recalls that for the LTCB, the end of the high-growth period was accompanied bya capital investment pullback by major firms and a gradual decline in long-term
capital demand. The LTCB accordingly began to look from large firms to mediumranked firms and then from medium-ranked firms to small and medium enterprises as
new sources of capital demand, and ended up financing real estate projects and realestate–related projects, attracted by their large-lot collateral, and that was what caused
the economic bubble. A further factor was that ongoing overbanking prompted banks
to compete among themselves for new clients, leading them down the road of realestate financing [p. 497].
2.2 Causes of the bubble economy collapse
Having closed at an historic peak of 38,915 yen on December 29, 1989, stock prices
changed direction sharply, plunging by 202 yen on January 4, 1990, the first trading
day of the year, and simply continuing to slide. As for land prices, metropolitan land
prices are said to have launched into a major downturn as of 1991 (1989 in the case ofTokyo). Officials and business managers agree that the quantitative restrictions on theextension of real estate–related loans, a factor in the sharp decline in land prices, werealso the trigger for the collapse of the bubble economy. This section summarizes
causes of the bubble economy’s collapse, focusing in particular on the slump in land
prices.
In response to public demand for land price restraint, as of 1987 the government
adopted a succession of land price measures, but many of the actual parties from that
era see the quantitative restrictions on the extension of real estate–related loans thatwere introduced in March 1990 as having been particularly potent. MOF and BOJ
personnel as well as politicians and others all expressed the same view.
For example, former MOF Banking Bureau councillor Nakai observes that since theland price countermeasures taken by the National Land Agency appeared to be having
no effect, quantitative restrictions on the extension of real estate–related loans were
instituted in March 1990 under the guidance of the Cabinet Office as a monetary
policy that would rectify the problem. Because this happened just when banks werefeeling that they had lent too much and would have to pull back, it had a greater than
expected effect. If these quantitative restrictions had therefore been abandoned six

5months earlier than the actual date of December 1991, the situation would have beendifferent [p. 264]. Former executive secretary to the prime minister Yoshio Nakajima
too comments that looking back now, the land-related quantitative restrictions seem tohave been the factor that really turned the Japanese economy upside down. It was
unfortunate that very few people were able to recognize this at the time [p. 456].
Former BOJ executive director Suzuki notes that because land prices had continued torise throughout the postwar period, the myth that land would always appreciate
seemed unlikely to crumble over something minor. However, the constraint on landrelated lending imposed by the March 1990 quantitative restrictions on the extensionof real estate–related loans had a much more powerful effect than the BOJ’s monetary
tightening [p. 570]. Former member of the House of Representatives Hamada is alsoof the view that the quantitative restrictions (March 1990–December 1991) were toolate [p. 400].
Similar official government calls for banks to restrain their land transaction–related
lending were issued in 1972 during the investment boom prompted by thegovernment’s plan to remodel the Japan archipelago, and again after the first oil shockin 1975. This time, however, as noted above, land prices stopped rising as of 1989 in
the Tokyo area and land transactions too declined as of the mid-1990s, so it would
seem that as of around the time when the quantitative restrictions were instituted,
trends in land supply and demand and speculative investment were in the process ofchanging. Hamada further points to the adoption of a notification system for landtransaction prices under the National Land Use Planning Act and the introduction of aheavy taxation system for land sales that imposed a capital gains tax of up to 39
percent (income tax of 30 percent and resident tax of 9 percent—making a total of 39
percent in additional taxes—levied when individuals buy land held for not more than
five years). These two schemes together with the quantitative restrictions made up thetriumvirate of factors collapsing the bubble [p. 400].
In addition, in May 1989, the BOJ instituted monetary tightening for the first time innine years in order to stop economic overheating causing inflation. According toSuzuki, the general rule for monetary policy is early but small shifts (usually 0.25
percent at a time), but in May 1989, the official discount rate was raised 0.75 percent
to 3.25 percent and went on from there to a peak of 6 percent in August 1990 (which
was also too late), and this is what prompted the bubble to burst [p. 570].
2.3 Factors increasing nonperforming loans
The Japanese economy struggled during the protracted clear-up of nonperforming
loans. Having climbed steadily throughout the postwar period, land prices began totumble as of 1991, prompting the emergence of bad debts, but the real financial crisis
didn’t begin until the mid-1990s. In the end, around 60 trillion yen in public funds
was injected and by 2005, the nonperforming loans carried by the banking sector had
reached 118 trillion yen, propelling the entire financial system into a state of crisis.
This section focuses on the question of why bad debts piled up to such an extent,summarizing oral histories concerning the path up to that point.
The first issue in relation to nonperforming loans is the question of the scale which
financial institutions’ bad debts had reached before the severity of the situation was

6

recognized. Even after the bubble economy collapsed, the sense of crisis over the bad
debt issue was initially quite limited. Personnel from both MOF and private-sector
financial institutions concur that banking circles blithely assumed that because of themassive unrealized capital gains on stockholdings, even if bad debts increased, thosestocks could simply be sold off.
Former vice-minister of finance for international affairs Haruhiko Kuroda suggests
that, despite stock and land prices beginning to plummet as of 1990–91, the reason
that a full-scale financial crisis did not take place until October 1997 was because
banks had several trillion yen worth of unrealized gains on land and stock dating backto the prewar period. This huge store of unrealized gains was also the reason that,
unlike in the United States, the introduction of public capital was delayed [p. 536]. On
the bank side, former LTCB executive Yanai observes that in the early 1990s, somebank staff were deeply worried about the increase in bad debts caused by a further
downturn in land prices, but bank management optimistically believed that themassive unrealized capital gains on stockholdings would allow banks to simply
dispose of those stocks if they had to (in other words, all they needed was a followingwind) [p. 474].
As for the actual nonperforming loan burden, in April 1992, MOF announced for the
first time how much bad debt financial institutions were carrying, but that was
followed by major upward revisions, etc., that suggest some confusion over the exact
situation. Personnel from private-sector financial institutions, MOF, and the BOJ
offered some fascinating insights on this point, touching on issues such as MOF
interviews with financial institutions and disclosure of the size of the bad debt burden.
Yanai reports that MOF’s Banking Bureau recognized the severity of thenonperforming loan situation in around 1992, conducting interviews with the various
banks about their bad debts. However, the definition of a bad debt was extremely
loose, and a strong village mentality also prevailed, with the personnel at the various
banks who were in charge of dealing with MOF representatives exchanging
information among themselves and rounding off the figures they reported accordingly.
These factors delayed both the disclosure of and responses to the bad debt burden [p.
474].
Former MOF Banking Bureau councillor Nakai ascribes the slow response to dealing
with bad debts to the unexpectedly steep plunge in land prices and the fact that small
and medium-sized and local financial institutions were in competition with the postal
savings scheme to capture deposits. These institutions were opposed to disclosing
their bad debts because their position was weaker than that of postal savings, and they
were afraid that disclosure could cause them to lose out on deposits and push theminto the red [p. 299].
Former BOJ executive director Suzuki comments that MOF must have realized thatthe jusen (nonbank housing loan company) issue was simply the tip of the bad debt
iceberg, and that an austerity budget at that point would set the whole issue alight.
However, the formulation of the Fiscal Structural Reform Act as well as the feelingthat it would be dangerous to tell politicians the truth about the bad debts because it
would bring the problem out in the open meant that politicians were left uninformed
and nonperforming loans continued to accumulate. (Then-chief cabinet secretary

7

Seiroku Kajiyama apparently later regretted not knowing how serious the bad debt
problem really was.) [p. 574]. It would therefore seem that inadequate awareness ofbad debts and the idea that disclosing information such as the actual volume ofnonperforming loans would conversely be disadvantageous were factors behind thebad debt pileup.
Another issue from the outset was that the assets securing financial institutions’ loans
continued to decline beyond what anyone at the time had expected. There were three
testimonies from MOF regarding the relation between the drop in land prices and bad
debts.
Former director-general of the MOF Banking Bureau Nobuyuki Teramura notes that
if land prices had stayed at the pre-bubble level (around 1987), it would have beenquite possible to dispose of bad debts using net business profits. However, land prices
began sinking in 1991, dropping to 50 percent of the peak level in 1994, while by2004 they had fallen again to around 80 percent of the 1994 level. As a result, evenwhen bad debts were cleared, more simply appeared in their place [p. 221]. Teramura
also addresses the question of why the commercial land price index sank to the 1973
level rather than stopping at the pre-bubble level. The only answer he can see is that a
structural change occurred in land prices, which had continued to grow at anabnormally rapid rate—faster than economic growth—for the 50 years of the postwar
period. This change was caused by Japan’s population concentrating in cities at thefastest rate ever, sending housing demand soaring. However, while laws such as theLand and Building Lease Act, the Agricultural Land Act, and the City Planning Act
were regarded as necessary regulations in terms of ensuring fairness and the public
interest, they ended up constraining the supply of residential land and consequently
causing an abnormal surge in prices for that land [p. 221].
Former director of the Commercial Banks Division in the MOF Banking Bureau
Toshiyuki Tsukazaki notes that the proper role of financial institutions is to provide
loans without relying on collateral and use inspections to ensure that loans are repaid,
and that interest needed to be collected on loans congruent to the risk. However, manysmall and medium-sized and local financial institutions instead pursued the businessmodel of covering losses on irrecoverable debts by using collateral such as real estateand land, based on the myth that land would always gain in price. As a result, they
were completely exposed to the plunge in land prices, creating the bad debts thattriggered a crisis across the financial system [p. 392].
In addition, because the massive bad debt burden impacted on financial institution
operations and caused managers to become far more cautious about lending, even thereal economy was affected, and particularly those methods used by the jusen
companies to dispose of bad debts became a political problem. According to memberof the House of Representatives Koichi Kato, around December 15, 1995 when thenext year’s tax framework was decided, then-administrative vice-minister for financeKyosuke Shinozawa and director-general of the Minister’s Secretariat Yoji Wakui
came along beforehand to explain the injection of public funds, which was a key itemin the budget negotiations. As LDP secretary-general at the time, Kato agreed to an
injection of 685 billion yen into the jusen companies, but he did not foresee theopposition in the form of disorder and session boycotts, etc., that would occur the8following year, to the extent that that Diet session became known as the “Jusen Diet”[p. 438].
Teramura recalls that MOF’s stance was that no injection of public funds should bemade before financial institutions became insolvent. However, the budget
negotiations at the end of 1995 when financial institutions had not yet reached thatpoint resulted in a 685 billion yen injection of public funds to deal with the jusen
problem. To respond to public criticism and get the bill through, the minister offinance had to promise in the Diet that no further injections of public funds would be
made. This meant that in 1997 when unrealized capital gains on stockholdings ran out
and public funds were really needed, MOF’s hands were tied, an episode that will
stand as a major blot in the history of financial administration [p. 234].
The view that this resistance to introducing public funds was to impact on subsequentbad debt disposal policies was also shared by other involved parties, a number ofwhom are quoted below.
Kuroda notes that when public funds were channelled into the jusen companies in
1996, Prime Minister Hashimoto met criticism in the Diet, forcing him to say that
there would be no further such injections, and this ended up hampering efforts to clear
up bad debts [p. 534]. Suzuki recalls that in response to the Hashimoto
administration’s declaration that putting paid to the jusen issue in 1996 spelled an end
to the bad debt issue as a whole, as well as the economic recovery in the mid-1990s,
in FY1997 the government put together a super-austerity budget with a deflationary
impact of 13 trillion yen and engaged in financial structural reform. The result was
zero growth for FY1997 and negative growth of 1.5 percent for FY1998, pushing the
economy into a slump and delaying the bad debt clear-up [p. 574].
In the process of the bubble economy collapse from the 1990s onward, there weremoves to make the inspection sector independent again on the grounds that inadequate
inspection functions had abetted easy financing. Yanai notes that various banks
introduced sales management divisions like the one which Sumitomo Bank
successfully copied from a foreign-affiliated consultant firm (whereby inspection
functions are incorporated into the sales and marketing division to reinforce theircustomer orientation). The effective result was that loans went ahead in the absence ofan inspection section and this complete paralysis of inspection functions became
another cause of bad debts [p. 489].
2.4 What lessons can be learned from the bubble economy experience?
What should we learn from the bubble/deflation experience of the last quartercentury? In this section, in addition to policy-makers we also consider the reflections
and lessons arising from the bubble economy experience of business managers inparticular.
Looking first at testimonies from policy-makers, MOF officers observed that eventhough they were actively involved during the bubble period as policy-makers, they
were unable to perceive the seriousness of the situation even when they had becomeaware of the bubble or during the bubble’s collapse.

9Former director-general of the MOF Banking Bureau Teramura notes that thegenerally accepted thesis now was that the monetary easing following Black Monday
on October 19, 1987, accompanied by West Germany raising its official discount rate
in 1988 while the BOJ failed to follow suit, was what generated massive liquidity andthe consequent change in the bubble. However, he stresses that at the time, there wasabsolutely no sense of this [p. 213]. Former executive secretary to the prime minister
Nakajima too notes that during the bubble period, very few people recognized the
bubble as a real threat, and similarly during the bubble’s collapse, it was difficult tosee clearly that something very serious was occurring [p. 456].
It would appear to be this failure of perception that caused the delay in dealing withthe bubble economy, but MOF officers, politicians, and others point out that there wasvery little debate at the time over issues such as the delay in policy shift when the
bubble economy emerged and in the policy impact when policies were instituted.
Former MOF Banking Bureau councillor Nakai reflects that when the first signs ofasset inflation emerged, they should have moved a little faster to curtail thatmomentum to prevent the future emergence of a bubble [p. 263]. Former viceminister of finance for international affairs Toyoo Gyoten also notes that policymakers should have looked more deeply into the implications of policies before they
were instituted. There is always the trade-off of scenario creation, but the reality isthat policy choices were often very haphazard [p. 512].
Former member of the House of Representatives Hamada felt that the delay in policy
shift was one factor causing the bubble to grow too large, and a similar delay was also
responsible for the bubble collapsing too far. That delay was the fruit of the overly
rigid vertical divisions down administrative organization [p. 417].
In addition, the Japan-US trade imbalance at the time influenced the decision to keep
the interest rate to be maintained at a low 2.5 percent, and personnel from both MOF
and the BOJ noted their regret that policy had not been pursued with more of apriority on Japan (the institution of monetary policies dealing with skyrocketing asset
prices).
Nakai states that while the primary cause of the US trade deficit was US overspending,Japan got too caught up in the bilateral trade imbalance issue and as a result sustained
a low interest rate (2.5 percent) policy. He feels that the lesson from that period wasthat more thought should have been given to the economic balance at home (theinstitution of monetary policies dealing with skyrocketing asset prices) [p. 262].
Former BOJ executive director Suzuki notes that some BOJ officers felt that if Japanraised its interest rate, there would be another Black Monday and that Japan mustn’t
disrupt international policy coordination. However, when Germany started raising its
interest rate by 0.25 percent increments as of July 1988, if Japan too had lifted its
interest rate at the same time, the BOJ could have overridden the permanent lowinterest myth and announced an interest rate rise. He believes that the BOJ shouldhave pursued policies with more of a domestic priority [p. 564].
In terms of lessons from the asset price rise, while this was picked up by the media
and made into a social issue that was even debated in the Diet, Suzuki observes that10

the interest rate was not lifted because of the stability evinced by domestic commodity
prices. However, while asset price movement is not generally considered a monetary
policy goal, more attention should have been paid to that movement as an interim goal
and an interim indicator [p. 564]. Similarly, former BOJ executive director Akira
Aoki feels that around 1987–88, when asset prices rose despite stable commodity
prices, the BOJ should have taken a strong policy stance and announced that if theofficial discount rate wasn’t raised, there would be trouble ahead. He also suggeststhat MOF should have consulted with the government and engaged in a strong andwide-ranging PR campaign to the effect that these high asset price figures were
emerging [p. 583].
Finally, in relation to financial inspections and supervision, MOF officers point out
that the sense of security arising from the presence of retired MOF personnel infinancial institutions as well as the rather simplistic view that as part of financial
liberalization, the government’s supervisory authority too should be minimized to thegreatest possible extent led to overly lax inspections and supervision.
Nakai observes that when jusen management starting going off the rails, MOF too
launched an investigation, but made the mistake of self-importantly treatingcompanies like jusen that were listed on the exchange and drawing a profit, and,moreover, that included former MOF personnel on their staff, as virtually under direct
MOF jurisdiction and making the comfortable assumption that such firms could
therefore not possibly go under [p. 269]. Former director-general of the MOF Banking
Bureau Yoshimasa Nishimura notes as a later regret that the time had come to change
long-standing administrative practices in Japan in regard to the relationship between
the bureaucracy and those parties under supervision. Rather than acting like the policeand handling inspection and surveys and dealing with problems such as these as
though the other party were a criminal, MOF personnel tended to regard personnel atfinancial institutions as fellow human beings and colleagues who had worked withthem to build up the financial system, an attitude which produced too much leniency[p. 334]. In addition, former director of the Commercial Banks Division in the MOF
Banking Bureau Tsukazaki recalls in relation to financial inspections in the early
1990s that as part of financial liberalization, the simplistic assumption was made thatgovernment supervisory authority should be minimized to the greatest extent possible,
resulting in too few staff being assigned to inspections and supervision. However,
because financial liberalization cuts back of the number of advance or preventive
regulations, MOF should have conversely bolstered the number of supervisory staff
and stressed institutional requirements (although the media would have strongly
resisted this on the grounds that it ran contrary to liberalization), conducting
meticulous inspections and supervision [p. 359].
From the private-sector financial institution side, former LTCB executive Yanai
believes that the biggest factor behind the failure of Japanese banks as a whole to deal
with the bubble economy was the failure of top management to stem the negative
chain reaction. In other words, the same people who had flown the flag of the bubble
economy were then left to clean up the mess, and when they realized that theywouldn’t be able to wipe it all away, they moved as fast as possible to cover it up
even in financial inspections. These top executives who didn’t know the meaning ofself-abnegation were what caused the bubble cleanup to fail [p. 475].

11

Finally, let’s look at the lessons that business managers identify. During the postbubble deflationary recession, consumer buying behavior changed. Some distributors
such as Daiei and Mycal went bankrupt, but other companies came through the crisis
to actually expand their power. Takuya Okada (honorary chairman of Aeon Co., Ltd.),
Toshifumi Suzuki (chairman and CEO of Seven & i Holdings Co., Ltd.), Hirotake
Yano (president of Daiso Industries Co., Ltd.), and Yohei Suzuki (president and CEOof Suzuyo & Co., Ltd.) share the view that the reason their firms survived was thatthey didn’t try to make money through investment in real estate or other areas outside
their principal business during the bubble period.
Okada from Aeon holds to the principle that whatever goes up will come down, andwhatever goes down will come back up. Consequently, even when land prices weresoaring during the bubble period, his company did not buy real estate or golf courses
but rather restricted itself to responding directly to consumers, its proper role as aretailer, and did not even branch into wholesale or manufacturing, with the result thatthe company was unaffected by the collapse of the bubble [p. 17].
Suzuki from Seven & i Holdings notes that from the time it was established, ItoYokado did not seek to increase its assets through real estate and stock investment,
but rather observed the basic policy of making a profit and growing through its
principal business. Making money out of buying and selling land was regarded aspoor form, and the company chose to engage in business without investing in realestate even from the perspective of incidentally profiting. As a result, even when thecollapse of the bubble sent land prices tumbling, the company was not significantly
affected [p. 57].
Yano from Daiso Industries observes that because yen appreciation and depreciation
don’t matter to consumers, neither were they part of the company’s management
policy. Adopting the philosophy of pursuing no value except bankruptcy, Daiso was
only interested in whether or not goods sold, and was not concerned about making
money or making a profit. Rather than dabbling in stocks, M&As, and other sidelines,
the firm regarded itself as its own rival. Yano also believes that the firm’s practice ofdisregarding past trends and successes and making fresh decisions each time was afactor in getting the company through the bubble period [p. 84].
Suzuki from Suzuyo suggests that anyone managing a firm instinctively wants to try
to expand their business, but to get by in a local area (Shimizu City, Shizuoka
Prefecture) and in amid social change, it is better to operate at an appropriate scale
which is easy to steer and avoid excessive borrowing. For that reason, the firm is still
not listed (and therefore wasn’t affected by the decline in stock prices). As a result,almost no companies across the entire group went into the red even after the collapseof the bubble [p. 173].
Identifying management policies that helped his firm survive the bubble/deflation
period, Suzuki from Seven & i Holdings notes that up until the 1970s, there were notenough goods, so even during recessions, if you lowered the price of goods, people
would buy them. As of the 1980s, however, consumption saturation has meant achange from a seller’s to a buyer’s market. Particularly after the bubble collapse,
consumer needs shifted from cheap to something new or something with new value—
in other words, consumers were no longer focused on price but rather on value. After12the bubble collapsed and deflationary sentiment started to prevail, most retailers
launched discount stores, but Seven-Eleven chose to pursue a psychological factor(the degree of customer satisfaction) rather than the economic principle of cheap or
expensive product prices, which may have helped it to survive the bubble’s collapse.
Taking another company as an example, Uniqlo didn’t just go for cheap but also
mixed in new, a strategy which earned it customer support and success [p. 52].
Suzuki adds that to survive that post-bubble phase when nothing was selling, it was
important to stimulate consumer mentality, so rather than simply applying a 10 or 20
percent discount, holding 5-percent “consumption tax back” sales and otherwise
adding meaning to information made it easy to reach the minds of consumers resistantto the consumption tax and had a major impact on product purchasing. In the case of
cash-back sales, whereby customers receive cash for the discounted portion of theprice, people feel quite differently about 20 percent discounts and 20 percent cashbacks. In other words, rather than getting a 20 percent discount on a product andpaying 4,000 rather than 5,000 yen, paying 5,000 yen and getting back that 1,000 yen
from the 20 percent discount in cash makes consumers want to spend that 1,000 yen
on something else because they feel they’ve done better than if they’d just received a
discount. Such psychological analysis is also important, Suzuki believes [p. 66].
3. Conclusion
What has the Bubble/Deflation Research Project and the recording of oral histories
revealed about the bubble/deflation period? What results has the project produced?
While there is no single answer, if I may risk misunderstanding, perhaps what wehave identified is that those who lived through the bubble/deflation period perceived it
in very diverse ways. In that sense, the 11-volume bubble/deflation research series has
great value in providing an overarching record of those wide-ranging contemporary
perceptions. Focusing on the oral histories, personnel from MOF, the BOJ, andvarious financial institutions, as well as business managers all experienced that era ofdramatic change from different positions and different angles. Only by overviewing
these diverse testimonies with their multiple perspectives does it become possible todevelop a three-dimensional picture of the complex bubble/deflation phenomenon. In
that sense, leaving an account of this nature is a task of great significance, enabling
different discoveries according to the particular approach to the material. I hope thatthe fruits of this research project will be utilized in modern history research as longlasting reference material, as well as in future institutional design and policy-making.
Bibliography
Komine, Takao, Baburu/defureki no Nihon keizai to keizai seisaku (rekishihen) 1:
Nihon keizai no kiroku—dai 2ji sekiyukiki eno taio kara baburu hokai made (1980–96) [The Japanese Economy and Macroeconomic Policies from the Beginnings of the
Bubble to the Overcoming of Deflation (History, Volume 1): Record of the Japanese
Economy—From Responses to the Second Oil Shock to the Collapse of the Bubble(1980–96)], 2011
Komine, Takao, Baburu/defureki no Nihon keizai to keizai seisaku (rekishihen) 2:
Nihon keizai no kiroku—kin’yukiki, defure to kaifukukatei (1997–2006) [The Japanese
Economy and Macroeconomic Policies from the Beginnings of the Bubble to the13Overcoming of Deflation (History, Volume 2): Record of the Japanese Economy—
Financial Crisis, Deflation, and the Recovery Process (1997–2006)], 2011
Matsushima, Shigeru and Takenaka, Harukata, Baburu/defureki no Nihon keizai tokeizai seisaku (rekishihen) 3: Nihon keizai no kiroku: jidai shogenshu (oraru hisutori)[The Japanese Economy and Macroeconomic Policies from the Beginnings of the
Bubble to the Overcoming of Deflation (History, Volume 3): Record of the Japanese
Economy—An Oral History], 2011
Iwata, Kazumasa and the Economic and Social Research Institute, Cabinet Office,
Government of Japan, Baburu/defureki no Nihon keizai to keizai seisaku—wareware
wa nani wo manandanoka [The Japanese Economy and Macroeconomic Policies fromthe Beginnings of the Bubble to the Overcoming of Deflation—What Did We Learn?],
2011

14