We must go back to the 1960s, and particularly the 1970s and early 80s. I do not know if you are aware (though I certainly am, because I experienced it first-hand when studying for my Master’s in Business Administration at Stanford University) that while it may come as a surprise now, during those years the Japanese economy was one of the most envied and admired in the world. At every business school, the “Japanese economic miracle” was enthusiastically studied. People praised and even worshiped the Japanese economic and entrepreneurial culture, which somehow seemed to have squared the circle. Workers were strongly protected in every company, in a quasi-family atmosphere, in exchange for the absolute reciprocal loyalty of each employee. This took place in a context of constant innovation and continuous economic growth in exports. It is true that the model largely rested on copying prior innovations and discoveries from the United States and Europe and launching them in the market at much lower prices and at a level of quality that was initially quite acceptable and later, even very high. However, this idealized model, which everyone wanted to follow as an example during those decades, turned out to be largely a mirage. It concealed the fact that both the Japanese culture and (especially) the Japanese economy were (and still are) extremely rigid and interventionist, and that what appeared during those years to be a highly prosperous and
stable economy actually rested on a huge bubble of artificial growth, monetary manipulation, and credit expansion. The bubble took shape mainly around the real estate market, and prices in the most valued areas of Tokyo and other important Japanese cities reached even thousands of yen and were quoted per square centimeter. And in that euphoric environment and speculative binge, the large Japanese industrial conglomerates (zaibatsus) became de facto speculative financial institutions which, as a secondary activity, relatively speaking, also manufactured vehicles,
electronic devices, etc. Well, at the beginning of the 1990s, the Japanese bubble burst, in perfect keeping with our Austrian theory of the economic cycle. Just to give you an idea, the Nikkei index fell from thirty thousand yen at the start of the 90s to twelve thousand yen ten years later. And still today, nearly thirty years later, it has yet to recover. There was a catastrophic collapse of the stock market, and a number of the foremost banks and financial institutions failed, one after the other.
We must focus our analysis on the reaction of the Japanese economic and financial authorities to the bursting of the bubble and the arrival of the financial crisis. But before we do that, we must remember the four possible scenarios that can follow the bursting of an irrationally “exuberant” financial bubble like this one in Japan.