Illusory Wealth and the Consequences of Japan's Burst Bubble
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Much of the wealth created was illusory
That boom created a lot of paper wealth, in which corporates appeared to be making large profits, often just based on unrealised property gains or stock market investments while their operating profits actually dwindled. Banks got sucked into this, financing projects whose main criteria for success was often just the underlying land price or cross-shareholding exposures. And when eventually, the BoJ started to respond to what it perceived as threatening inflation, it popped what had evidently become a massive financial bubble which encompassed not just the property market (real assets) but financial assets and the banking system too.
Contribution to profits in Japan 1986-1992
A burst bubble is a lot worse then slightly weaker growth
The stock market crashed and stayed low. Firms went bankrupt and insolvent banks were merged with larger more solvent ones under the so-called “convoy system” which meant that even previously healthy institutions were hobbled. The pain was lessened, but it was more widely distributed. Biting the bullet on bad loans and pulling the plug on zombie companies took a very long time which also prolonged the stagnation and delayed the eventual recovery.
The economy of course contracted and remained stagnant for years. Consumer price inflation turned negative and even nominal wages declined. It has taken decades for the economy to pull itself out of the mire that this bubble created, though it appears to be doing so now.
Nominal wages growth 1991-2015
