Japan: The Miracle That Faded Away

“There are four kinds of countries in the world: developed countries, undeveloped countries, Japan and Argentina.”

– Nobel Laureate Simon Kuznets

In the 1970’s and 80’s, Japan looked like a utopian society, riding on the backs of economic success, which at the time, no one understood why. This “Economic Miracle” baffled economists all around the world. But what’s astonishing is the fact, that just two decades ago this economy was almost entirely decimated during the second World War.

Nevertheless, this growth was followed by years of economic stagnation, that in many ways still exists today. Since 1991, the Japanese economy has been growing at a pace which is much slower than the global average GDP growth for industrialised countries.

So how did a war-torn country become the second largest economy in the world in such a short period? How did Japan go from “Economic Miracle” to economic stagnation? To understand, let us go back to the roots.

The Economic Miracle

During the second World War, the Japanese economy was practically converted into a war machine, and so when the war ended, the economy was almost entirely worthless for consumer goods production.

Hiroshima (1945), Source- Time Magazine

Due to the westernising influences of the occupying allied forces, the Japanese economy went through some critical changes after its defeat in the War. To rebuild the economy, the US provided some much needed aid, which in turn improved the relationship between the two countries.

This created an opportunity for Japan, wherein they could sell goods manufactured in Japan to the increasingly affluent US. The Japanese companies, to achieve competitive advantage, used to copy western products, improve them and then subsequently sell them for an even cheaper price. This was possible because they focused their efforts on developing innovative and efficient manufacturing methods, to compensate for the relative lack of natural resources.

In the 1970’s, when car manufacturing in the US was still done by hand, the Japanese had already started using assembly line robots. This ensured higher quality products at a much cheaper price.

By the 1970’s and 80’s this domination was extended to the global electronics industry. By this time Japan manufactured the majority of the world’s consumer electronics. Even in the computer hardware industry, Japan essentially had monopoly over the production of all the parts except the CPU Chip. This role as the “king of the global electronics industry” was further solidified when the gaming industry saw a major spike in the early 1980’s, with Nintendo and Sega practically leading the way.

It must also be noted that between 1961-1970 Japan grew by nearly 9.44% and between 1971-1990 by about 4.53% on a yearly basis. By the 1980’s, Japan’s GDP per capita rivalled or even surpassed many western countries. It was also the second largest economy in the world, only behind the US. On the back of such economic success, this phase, until 1989 was referred to as the “Japanese Miracle”.

The Bubble Economy and The Subsequent Crash

Broadly speaking there are two reasons as to why the “Bubble economy” formed.

The first reason was basically kick-started following the ‘Plaza Accord’ of 1985. At this meet, to reduce The US trade deficit, it was decided to devalue the US Dollar by almost 50%. This meant that the Japanese Yen had become more expensive for the US citizens. This was a major blow to Japan as almost 40% of its exports where to the US.

To compensate for the impending trouble, the Japanese government and the Bank of Japan decide on two things. First, to boost domestic demand and the second, to roll out an expansive monetary policy to compensate for the effects of the Plaza Accord.  

In this way, in the following two years, interest rates were slashed by 50%, government increased its public spending and the banks were encouraged to lend to households so that that they could launch themselves into the real estate market.

This policy caused the real estate prices to sharply increase, which in turn increased their value as collateral, enabling the households to borrow more and more, and just like that the vicious spiral of the real estate bubble had been set in motion.  

It should also be noted, that due to Japan’s strict fiscal policies in the 60’s and 70’s, household savings were encouraged and so by 1985, Japan had already become the world’s largest creditor. Thus, when the prices in the real estate market started to increase, all these savings were being diverted to the real estate market, further adding to the problem. 

To understand the second reason, we must first look into how the Japanese industries were being run. At that time, many of major businesses practiced a corporate invention called “Zaitech” or “financial engineering” where in, speculative profits and capital gains were also reported as a source of income in the company’s financial statements. Since such high profits were being reported, their stock prices continued to rise and thus these companies were able to get loans from banks at very low rates of interest. Further, this borrowed money was again reinvested into the stock market and the real estate market. Thus, the vicious cycle of the stock market bubble was also set in motion.

Now as long as the stock prices and the real estate value continued to rise, companies were able to report blowout profits. At one point, it was estimated that 40-50% of corporate earnings were derived from zaitech.

At the peak of the bubble, the Nikkei stock index saw astronomical hights, reaching as high as 39000 points in December 1989, which accounted for about one-third of the world’s stock market capitalisation.

Similarly, real estate prices also saw a meteoric rise, with prices in Tokyo’s prime neighbourhoods rising to prices that were almost 350 times more expensive than comparable land in Manhattan. Soaring stock and real estate prices generated astounding amount of bubble wealth in Japan.

By 1989, the Japanese officials became increasingly concerned with the counties growing asset bubble and so the Bank of Japan decided to tighten the monetary policy. But as soon as this step was taken, the Nikkei stock bubble popped in 1990, dropping down to nearly 50% in a single year. Since the stock bubble imploded, the real estate bubble also popped, plunging the country into deep financial crisis after almost 30 years of economic prosperity.  

Source-National Graduate Institute for Policy Studies (GRIPS), Japan
Source-National Graduate Institute for Policy Studies (GRIPS), Japan

The Status Quo Now

The decade from 1991-2001 is referred to as the “Lost Decade”, as during this period the economy essentially stopped growing. At the time the economy grew by just 1.3% on a yearly basis. But this economic stagnation continued into the 21st century as between 2001-2010, the economy grew by an even lower 0.95%.

Cartoonist: Alicia D’Souza

Nevertheless, in the modern scenario Japan is facing even more problems. First, its working population has been declining since the mid 1990’s. Second, the trend towards globalization implies keener international competition not only in the manufacturing sector but also in the service sector. When you factor in all these problems, a sustained growth seems like a farfetched reality. But against all odds, when Shinzo Abe came into power in late 2012, Japan actually started growing consistently. During the years he remained in power, the economy on an average grew by 1.1% each year and did not go into recession in any of the them.                                                                                                       

But since he resigned in September 2020, his successor has a tough job at hand, especially considering the fact that the COVID-19 pandemic has essentially crippled the global economy.

Today Japan is the 3rd largest economy in the world, but at the same time is almost 3 times smaller than China. Even though the current situation will improve, it is widely agreed that Japan’s growth rate will continue to fall. Thus, in many ways, Japan is a failing economy, which in every sense of the word is an enterprise that is going out of “business”.

– Savio Joe (Writer, Econ Declassified)


Colombo, J. (2012, June 4), Japan’s Bubble Economy of the 1980’s

retrieved from http://www.thebubblebubble.com/japan-bubble/

Kwan, C.H. (2000, June 1), Revitalizing the Japanese Economy

Retrieved from https://www.brookings.edu/research/revitalizing-the-japanese-economy/

Herbener, J.M.  (1999, September 20), The Rise and Fall of the Japanese Miracle

Retrieved from https://mises.org/library/rise-and-fall-japanese-miracle

Neilson, B. (2020, Feb 11), The Lost Decade: Lessons from Japan’s Real Estate Crisis

Retrieved from https://www.investopedia.com/articles/economics/08/japan-1990s-credit-crunch-liquidity-trap.asp

Lee, Y.N. (2020, September 2), ‘Abenomics’ fell short — Japan’s new prime minister will have to pick up the slack

Retrieved from https://www.cnbc.com/2020/09/03/charts-show-successes-and-failures-of-abenomics-in-lifting-japans-economy.html

The World Bank (n.d.), GDP Growth (annual %) – Japan

Retrieved from https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=JP  

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