OIL EMBARGO AND GROWTH IN JAPAN IN THE 1970s
America Japan had the world’s second largest economy for 42 years from 1968 to 2010. Prime Minister Tanaka Kakuei’s Basic Economic and Social Plan (February 1973) forecast continued high growth rates for the period 1973–1977. However, by 1973 domestic macroeconomic policy had resulted in a rapid increase in the money supply, which led to extensive speculation in the realestate and domestic commodity markets. In 1973 the Japanese economy was suffering an inflation spiral caused mainly by surging land prices triggered by a nationwide development boom. Japan was already suffering from double-digit inflation when the outbreak of war in the Middle East led to an oil crisis.
In October 1973, war broke out in the Middle East and Arab oil-producing nation cut supplies to countries that supported Israel. Oil prices quadrupled, consumption declined and high raw material costs hit companies hard. In 1974 and 1975 after the Arab oil embargo Japan went into a severe recession. GDP shrunk 0.5 percent in fiscal 1974 and 4 percent in fiscal 1975 with the worse drop of 13.1 percent occurring the January-March 1974 quarter.
Energy costs rose steeply and the yen’s exchange rate, which had not reflected its true strength, was shifted to a floating rate. The consequent recession lowered expectations of future growth, resulting in reduced private investment. Economic growth slowed from the 10 percent level to an average of 3.6 percent during the period 1974–1979, and 4.4 percent during the decade of the 1980s. [Source: Web-Japan, Ministry of Foreign Affairs, Japan]
“A second oil crisis in 1979 contributed to a fundamental shift in Japan’s industrial structure from emphasis on heavy industry to development of new fields, such as the VLSI semiconductor industry. By the late 1970s, the computer, semiconductor, and other technology and information-intensive industries had entered a period of rapid growth. As in the high-growth era, exports continued to play an important role in Japan’s economic growth in the 1970s and 1980s. However, the trade friction that accompanied Japan’s growing balance of payments surplus brought increasingly strident calls for Japan to further open domestic markets and to focus more on domestic demand as an engine of economic growth. [Ibid]
Websites and Resources
Good Websites and Sources: Economic History and Economy of Japan applet-magic.com ; Google E-Book: Economic History of Japan 1600-1990 books.google.com/books ; Google E-Book: Emergence of Economic Society in Japan 1600-1990 books.google.com/books ; Economic History Links let.leidenuniv.nl/history
Bubble Economy, Its Collapse and Recession: ; The Japan Bubble Economy lewrockwell.com/thornton ; Stock Market Bubble researchmag.com ; Bubble Economy and the Bank of Japan allacademic.com ; IMF Paper on the 1980s Asset Price Bubble pdf fileimes.boj.or.jp/english ; Land Prices Between 1974 and 2007 tochi.mlit.go.jp ; Global Property Report on Japan foreclosured.blogspot.com ; Lessons the Recession in Japan in the 1990s rjones2818.blogspot.com ; Book; The Holy Grail of Macroeconomics, Lessons from Japan’s Great Recession wiley.com/WileyCDA ; Bubble Burst and Recession – 1990s grips.ac.jp/teacher/oono Ambitious Bubble Era Amusements that Closed
Wild Blue Yokohama on Aaron’s World sfsjapan.blogspot.com Lalasport Ski Dome (closed in 2002) on Wikipedia Wikipedia Phoenix Seagaia Resort Sheraton
Links in this Website: ECONOMIC HISTORY OF JAPAN BEFORE THE 1970s Factsanddetails.com/Japan ; ECONOMIC HISTORY OF JAPAN AFTER THE 1970s Factsanddetails.com/Japan ; ECONOMIC REFORMS AND RECOVERY IN THE 2000s Factsanddetails.com/Japan ; JAPAN AND THE GLOBAL ECONOMIC CRISIS IN 2008 AND 2009 Factsanddetails.com/Japan ; MACROECONOMICS IN JAPAN Factsanddetails.com/Japan ; JAPAN INC. AND REFORMS Factsanddetails.com/Japan
Good Websites and Sources on Economics: Ministry of Economy, Trade and Industry meti.go.jp/english ; Ministry of Finance of Japan mof.go.jp/english ; Japan Economy News and Blog japaneconomynews.com ; Japan Economy Watch japanjapan.blogspot.com ; Japan Center for Economic Research jcer.or.jp/eng ; Japan Inc. Economic and Business News japaninc.com ; Google E-Book: Japan in the 21st Century, Environment, Economy and Society (2005) books.google.com/books
Japanese Economy in the 1980s
Again in 1980 Japan suffered from high inflation and recession mainly due to large hikes in the price of imported oil. The exchange rate reaches 360 yen to the dollar in the 1970s.
Even so economic growth continued at a robust rate through the 1970s and 80s, with the growth in the 1980s about 5 percent a year, about half the growth rate that China experienced in the 2000s. With the help of the oil embargo Japan captured 21 percent of the world's automobile market by the mid 1970s.
Japan overtook Germany to become the world’s second largest economy in the 1970s. By the 1980s, Japan had built up such huge trade surpluses and the yen had become so strong that Japanese businessmen was buying up properties all over the world, and Japanese tourists were fanning out to every corner of the globe. Many people thought Japan was poised to dominate the world economically and Japan bashing became a popular conversation topic in the United States and elsewhere.
Japanese Economy Peaks in the Late 1980s
“The original Asian success story, Japan rode one of the great speculative stock and property bubbles of all time in the 1980s to become the first Asian country to challenge the long dominance of the West,” the New York Times reported. “In the 1980s, a mighty — and threatening — “Japan Inc.” seemed ready to obliterate whole American industries, from automakers to supercomputers. With the Japanese stock market quadrupling and the yen rising to unimagined heights, Japan’s companies dominated global business, gobbling up trophy properties like Hollywood movie studios (Universal Studios and Columbia Pictures), famous golf courses (Pebble Beach) and iconic real estate (Rockefeller Center).
There was was even talk of Japan’s economy some day overtaking that of the United States. In 1979 Ezra Vogel, a Harvard academic, wrote a book entitled Japan as Number One: Lessons for America in which he portrayed Japan, with its strong economy and cohesive society, as the world’s most dynamic industrial nation.
In the United States there was a lot of hostility towards Japan’s success. American auto workers smashed Japanese cars. In June 1982, a Chrysler supervisor and his son, who had been laid off at a Michigan auto plant, killed a Chinese American man thinking he was Japanese. In a 1991 ABC News-NHK survey 60 percent of American aid they viewed Japan’s economic strength as a threat to the United States. In 1992, Senator Paul Tsongas, who was running for U.S. president at the time, said, "The Cold War is over, and Japan and Germany have won."
1985 Plaza Accord and its Aftermath
What became the Japanese Bubble Economy was set in motion in 1985, when U.S. Secretary of the Treasury James A. Baker III got together with the finance ministers of Britain, France, West Germany and Japan in an effort to reduce the value of the dollar to increase the export of American goods. The plan—now referred to as the 1985 Plaza Accord— worked but it also doubled the purchasing power of the yen. When Japan allowed the yen to double in value its trade surplus for the most part didn’t change but the amount of high-value yen did.
Following the 1985 Plaza Accord, the yen’s value rose sharply, reaching 120 yen to the U.S. dollar in 1988—three times its value in 1971 under the fixed exchange rate system. A consequent increase in the price of Japanese export goods reduced their competitiveness in overseas markets, but government financial measures contributed to growth in domestic demand. Corporate investment rose sharply in 1988 and 1989. With higher stock prices, new equity issues swiftly rose in value, making them an important source of financing for corporations, while banks sought an outlet for funds in real estate development. Corporations, in turn, used their real estate holdings as collateral for stock market speculation, which during this period resulted in a doubling in the value of land prices and a 180 percent rise in the Tokyo Nikkei stock market index. In May 1989, the government tightened its monetary policies to suppress the rise in value of assets such as land. [Source: Web-Japan, Ministry of Foreign Affairs, Japan]
“However, higher interest rates sent stock prices into a downward spiral. By the end of 1990, the Tokyo stock market had fallen 38 percent, wiping out 300 trillion yen (US $2.07 trillion) in value, and land prices dropped steeply from their speculative peak. This plunge into recession is known as the “bursting” of the “bubble economy.” [Ibid]
Bubble Economy in Japan
The "bubble economy" (baburu keizai) refers to period of unparalleled economic growth in the 1980s. The bubble began swelling in 1986 when Japan's share of world exports was at its peak In the next four years assets grew 80 percent. The bubble topped out on December, 29, 1989 when the Nikkei index reached a historic high of 38,915.87, and it appeared Japan was on the verge of surpassing the United States as the world’s most powerful economy.
In the late 1980s after banking laws were relaxed, Japan went on a buying and building frenzy using credit to pay for most of it. The stock market took off and property values soared. The 51-month “bubbleboom” lasted from December 1986 to February 1991. It was brought about by a surge in exports of automobiles and electronics and the availability of cheap capital. Japanese companies built factories at a rapid pace, bought up companies and properties and invested in all kinds of development projects. Speculation pushed Japanese land and securities to astronomical levels.
Tokyo banks became the world's biggest and most powerful. Interest rates were so low that loans were practically free and banks and businesses were flush with cash. Japanese businessmen invested and borrowed as if there was no tomorrow, pushing up prices of stock and real estate even further. The influential Japanese philosopher Akira Asada dubbed it “infantile capitalism.”
In the bubble economy businessmen boasted of spending $30,000 in one night out and $300,000 in one week of partying. People flew from Tokyo to Sapporo just to enjoy a bowl of noodles and waved ¥10,000 banknotes to get taxis when taxis were scarce. New hirees bought Armani suits with their first paycheck and men bought Tiffany necklaces for women they just met and persuaded the women to take them because “everyone’s got too much money anyway.”
The period was brought back with the film Bubble Fiction: Boom or Bust (2007). On working during the bubble period, Kate Elwood wrote in Daily Yomiuri, ”It was an exciting time...Many companies were doing well economically, and increased globalization had led to a ‘Let’s give it a go!’ attitude in which hitherto sacrosanct business practices were re-examined. Not all proposals were enthusiastically implemented, but there was sense that it was open for discussion...A lot of changes were underway.”
Grandiose Development During the Bubble Economy
Seagaia Ocean Dome Real estate and stock prices pushed each other up and helped companies make record profits from financial investments. When the Japanese economy was booming profits were used as collateral for loans on real estate. The real estate was then used as collateral to buy shares on the Tokyo Stock Exchange. The stocks in turn was used as collateral on yet more borrowing. All this was well and fine when land and stock prices were climbing. Toyota, for example, made $2.9 billion from cars and $1.2 billion from financial deals in 1989.
Banks, insurance companies and other financial institutions made many foolish and highly speculative investments.
Seagaia Resort near Miyazaki on Kyushu is one of the best example of an ill-conceived, outrageously expensive bubble economy project. Billed as the world's largest indoor water recreation center, it was 100 meters wide, 300 meters long and 38 meters high, and had a huge 10,000-person wave pool, artificial beach made of crushed Chinese marble, a man-made volcano that erupted every 15 minutes, and a variety of slides, shops and snack bars. The facility also contained a convention hall, 99 holes of golf and four hotels, including one with 45 floors and 753 rooms.
In the wave pool, waves up to eight feet high were generated by a wave machine with 40 computer-controlled vacuum chambers. Underneath the blue sky painted onto the complex's ceiling (which slides open in nice weather and was the world's largest retractable ceiling) were man-made clouds, which slowly drifted by. Ironically the ocean was only a few minutes away.
Seagaia was conceived in 1988, during the height of the Bubble Economy. Built at a cost of $2 billion, it opened in 1994. Planners expected the project to show a profit its first year based on the assumption it would attract 5.5 million visitors. It only attached 2.7 million. The next year it drew 3.86 million, which was not enough to make it profitable. By 1999, the resort owed more than $1.2 billion and its bank refused to lend it any more money. In 2001, Seagaia filed for bankruptcy.
See Education, Health... ; Energy, Water, Infrastructure; Infrastructure and Public Works in Japan; Unnecessary Public Works Projects in Japan
Expensive Real Estate and Investments During the Bubble Economy
Dior building in Ginza Flush with cash, Japanese companies gobbled up real estate in Hawaii and California, including the Pebble Beach golf course, the Hotel Bel Air in Los Angeles and the Grand Wailea and Westin Maui hotels. One tycoon reportedly drove through neighborhoods in Honolulu in a limousine and asked his assistant to ring the doorbell of houses he fancied and make an offer on the spot. Japanese companies also bought up American entertainment companies. Sony purchased Columbia Pictures for $4.2 billion; Matsushita spent $6.1 billion for MCA; and Mitsubishi purchased 80 percent of Rockefeller Center, the home of NBC.
At the height of the bubble economy all the property in Japan, which is smaller than California, was worth five times that of the United States. According to the Guinness Book of Records, the land in central Tokyo around the Mediya Building was the most expensive in the world ever. In October 1988 the Japanese National Land Agency estimated its value at $248,000 a square foot. Mediya is a retail food store. The grounds of the Imperial Palace in downtown Tokyo was said to be worth all the land in California. Australia sold part of the land its embassy was on and paid off half of its foreign debt.
In the late 1980s the richest men in world were Japanese who made billions of dollars in real estate. Some tycoons went as far as coating their food with gold because they believed it was good for their health.
If buyers were a little short of cash Japanese banks were more than happy to come up with the difference. Real estate agents typically jacked up prices 10 to 50 percent higher if they knew Japanese were involved, One was quoted as saying, “Don’t worry about being expensive. I am sure the banks will help. They always do."
Image Sources: 1) Toyota 2) Time magazine, 3) Seagaia Sheraton 4) Ray Kinnane 5) 7) 11) Wikipedia 6) 10) Andrew Gray Photosensibility 9) Rob's Files Faq Japan
Text Sources: New York Times, Washington Post, Los Angeles Times, Daily Yomiuri, Times of London, Japan National Tourist Organization (JNTO), National Geographic, The New Yorker, Time, Newsweek, Reuters, AP, Lonely Planet Guides, Compton’s Encyclopedia and various books and other publications.
© 2009 Jeffrey Hays
Last updated August 2012