Bubbles

Abstract

In the latter half of the 1980s, Japan’s export-led growth strategy reached an impasse. To avoid a trade war with the United States and to stop the hyper-appreciation of the yen, it tried to rectify its trade imbalance by stimulating domestic demands. The country also embarked on financial deregulation. These resulted in asset price bubbles, which was much bigger than the ones in the United States in the 2000s.

By the mid-1980s, the Japanese economy had overgrown the limit its export-led growth strategy could sustain economically and geopolitically. In his analysis of fault lines leading to financial crises, Rajan (2011) argued, “What is particularly alarming for the future of countries following this path [of dependence on exports for growth] is that Japan did try to change, but without success.” In this chapter, we look at how Japan tried to transform itself, and how the efforts, combined with the universal mechanism of financial cycles, drove the country from despair in 1986 to lethal hubris in 1989.

Export-Led Growth Strategy Reaching an Impasse

The export-led growth strategy, which led Japan to become the second-largest economy in the world, reached an impasse by the mid-1980s. Two symptoms signaled that Japan had overgrown its strategy: the trade war with the United States and the rapid appreciation of the yen.

In 1985, the US Senate passed by 92-0 a resolution urging the US president to retaliate against Japanese imports. That same year, Prime Minister Nakasone urged the nation to buy 100 dollars more per person of foreign products. In 1986, former foreign minister Okita, after having visited Washington, DC, reported back to Tokyo that the atmosphere there was like that on the eve of the outbreak of war.

In April 1987, the US president decided to apply retaliatory tariffs on imports from Japan. In May, the US House of Representatives overwhelmingly approved a trade bill which included retaliatory provisions targeted at Japan. In July, seven US congressmen invited journalists to a courtyard at Capitol Hill, where they smashed with hammers electronic appliances made in Japan. The scene was broadcast and shocked the Japanese. The ratio of Americans who responded yes when asked if Japan is a dependable friend declined from 57% in 1984 to 48% in 1988.

Throughout the post-WWII period, the Japan–US relationship was the cornerstone of the Japanese diplomacy. The United States was by far Japan’s largest trading partner; and Japan relied on US troops stationed in Japan, the Seventh Fleet of the US Navy, and US nuclear deterrence for its national security. A trade war with the United States had to be averted at any cost.

The second symptom was the rapid appreciation of the yen.

Japanese industry and government initially considered acquiescing on the appreciation of the yen if such a move would alleviate the risk of a trade war. Paul Volcker recounts that, at the meeting of the Group of Five finance ministers and central bank governors on September 22, 1985, he was startled to see that the Japanese finance minister Takeshita was far more forthcoming than other participants had expected and volunteered to permit the yen to rise by more than 10%.¹ The meeting produced the Plaza Accord, which stated that “some further orderly appreciation of the main non-dollar currencies against the dollar is desirable.”

The ensuing appreciation of the yen was by no means orderly and was far beyond the initial anticipation. The yen, which was at 240 yen per dollar on the Friday before the Sunday Accord, reached 152 yen per dollar one year later, and 121 yen per dollar at the end of 1987, doubling its value against the dollar just within two-and-a-quarter years. Japanese manufacturers were thrown into a panic. They repeatedly introduced aggressive cost reduction plans, only to be defeated by the new exchange rate.

Halting the appreciation of the yen thus became the top priority of Japan’s economic policy. Miyazawa Kiichi, who succeeded Takeshita as finance minister, later recounted, “When I became finance minister in July 1986, the minister’s job was nothing other than to think about how to excuse the endless yen appreciation and what the government could do to address it.”² Sumita Satoshi describes his term as the Bank of Japan governor (1984–1989), “From the beginning to the end, it was about the exchange rates.”³

Expanding Domestic Demand

To address the risk of a trade war and the appreciation of the yen, Japan mobilized a whole range of policy tools, including a new national doctrine to transform the economic structure, government-designed dreams and projects, deregulation of land use, and fiscal and monetary stimulus.

The prime minister asked Mayekawa Haruo, a former governor of the Bank of Japan, to chair a wise men’s group, the Committee on Structural Adjustment of the Economy for International Coordination, and find solutions. The report by the Committee published in 1986, or the Mayekawa Report, was ready to sacrifice even the lifestyle of the nation for international coordination:

Japan’s long-lasting large-scale current account imbalance is driving both the Japanese economic policy and the harmonious development of the global economy into a crisis. Now it is the time for Japan to make a historic transformation of its economic policy and of the lifestyle of the nation.

To attain “the transformation into the domestic-demand driven and international-coordination oriented economic structure,” the report provided a list of recommendations. The top item on the list was the expansion of domestic demand.

One week after the publication of the report, Prime Minister Nakasone flew to Washington, DC and presented it to President Reagan. Later, Prime Minister Takeshita, who succeeded Nakasone, incorporated the recommendations into his five-year economic plan titled Japan in Symbiosis with the World. Domestic demand-led growth had become a new national doctrine, replacing that of export-led growth.

The quickest means of expanding domestic demand is boosting public works, but, as the government had the policy of achieving fiscal consolidation without tax increases, it decided to rely on the mobilization of private sector funds for large-scale projects by way of policy inducements. The policy was called min-katsu, where min stood for private sector funds and katsu for mobilization.

The government started massive sales of state-owned land to the private sector for use in development projects. A special min-katsu law was enacted to introduce a package of deregulations. These policies were accompanied by the government-created visions of a global city and resort towns.⁴ The Fourth National Comprehensive Development Plan, approved by the cabinet in February 1987, maintained, “The Tokyo area is expected to accumulate global-city functions such as those of international financial and information hub and will become the core city of the Pan-Pacific region and one of the nerve centers of the world.” It predicted that additional 4000 hectares of office space, or office space equivalent to that which already existed in central Tokyo, would be needed in the wider Tokyo region by 2000.

National ministries and agencies, local governments, and industry rushed into the competition to lead new projects. When the Tokyo Metropolitan Government presented a project to develop an area near Tokyo Bay in 1985, the size of the project was only 40 hectares, but the next year, the joint statement by seven ministries and agencies expanded it to 1200 hectares. Gigantic projects designed by the public sector strengthened the bullish sentiments in the society at the time, but the projects themselves mostly ended up with bankruptcies later.

Often government-invented visions are forgotten soon after their heralded announcement, but, for good or bad, the vision of the global-city Tokyo was widely believed in and actively utilized. A popular movie produced in 1988, Tax Investigation Woman 2, depicted an underworld figure who assimilated his mission with the nation’s future. He recounts, “We kick and scare current residents out of building sites for the sake of the country. For Tokyo to become an international information hub and a global financial center, we need to attract big businesses from around the world. However, office space is absolutely in shortage. If we do not do land sharking, then Hong Kong will immediately take over Tokyo’s potential role.”

In retrospect, the prediction presented in the Fourth National Comprehensive Development Plan was not off the mark. In 2000, the total area of the office space in central Tokyo doubled to 8000 hectares, and the vacancy rate was in line with the natural vacancy rate. Tokyo failed to become a top-tier global financial center, but we cannot blame planners in 1987 for not being able to predict the calamities happened in Japan in the 1990s. Perhaps the problem was not the vision itself but the way it was utilized to justify reckless projects and lending.

For regions outside Tokyo, the government coined another vision: The Japanese had overworked in the past but, having become rich, they would spend their leisure time on golfing or ski runs in resort towns. In 1987, the Resort Development Law was enacted.

Development projects pursued in line with this vision included the world’s largest indoor beach designed to mimic Caribbean islands, the world’s largest indoor skiing course, a world toilet museum exhibiting a pure-gold western-style toilet, a village imitating a Dutch town with a six-kilometer long canal, and a village which claimed to have imitated Turkey equipped with reconstructed Noah’s Ark and a Trojan Horse.⁵ The Japanese, however, took advantage of the strong yen and spent their leisure time in the real Caribbean islands rather than on the fake one, turning the latter into the world’s largest indoor deserted beach.

The Bank of Japan aggressively eased its monetary policy. The official discount rate, which was 5% at the beginning of 1986, was reduced five times within two years to the historic low of 2.5% in February 1987 and stayed at that level for 2 years.

The chairman of the US Federal Reserve requested the Bank of Japan governor for a rate cut in August 1986, as did the US Treasury secretary to the Japanese finance minister in September.⁶ In October, the secretary and the minister issued a joint statement and two days later the governor cut the rate from 3.5 to 3%. The statement of the Group of Six finance ministers and central bank governors, or the so-called Louvre Accord, of February 1987 characterized the cut to 2.5%, which was announced two days before the statement, as part of Japan’s “monetary and fiscal policies which will help to expand domestic demand and thereby contribute to reducing the external surplus.”

In May, the Japanese prime minister said to the US president that he had instructed the finance minister and the Bank of Japan governor on short-term interest rate and that the operation had commenced. The US president indicated his satisfaction.⁷ Though the official discount rate stayed at 2.5%, the interbank market rate declined from 4% in March to 3.3% in May and stayed at the level during the summer. In June, on the margin of the G7 Summit meeting in Venice, the president stated to the prime minister that he hoped Japan to continue its efforts to lower interest rates and the prime minister responded that the efforts to guide short-term interest rates lower would be continued.⁸

As we will see in the next chapter, the Taylor rule, the monetary policy rule proposed by John Taylor in 1993, shows that the rate cuts during the period should have been even more aggressive than what the Bank of Japan did, given the strong deflationary impacts of the yen appreciation. In retrospect, it seems that the US authorities gave the right advice and that it was the Bank of Japan’s failure to reverse the policy in 1988 that sowed the seeds of later problems.

Fiscal policy followed suit. In early 1987, the US president’s decision to impose retaliatory tariffs on Japanese imports and the trade bill approved by the House shocked the Japanese government. The ruling party proposed a large fiscal stimulus package of 5 trillion yen and Prime Minister Nakasone increased it to 6 trillion. He reportedly said, “Hey, I had another go and beefed it up. The outcome is a significantly good one. The package will go a long way toward expanding domestic demand. I will attend the G7 Summit meeting in Venice with this policy package in hand. It will be appreciated.”⁹

In Venice, the president told the prime minister that the United States would lift part of the sanctions on the semiconductor imports from Japan.¹⁰

Financial Deregulation

While the appetite for real estate investments and speculation was fueled by the whole array of policy packages, the bankers were stripped of the regulations which protected them from competition and constraints that they had been accustomed to living with for the preceding 40 years.

In 1984, deregulation was long overdue, given the emergence of the large government bond market, where interest rates were determined by supply and demand, and the growth in cross-border transactions with overseas markets, where deregulation had already advanced. Although Japan’s financial system, which was designed to allocate resources according to industrial policies and development goals, proved to be highly efficient when the country was catching up with the United States and Europe, such a system might not be best suited to the post catch-up era, in which new frontiers of growth had to be explored on Japan’s own, relying more on private sector entrepreneurship and innovation.

However, the move toward deregulation was initiated in the United States. In September 1983, Caterpillar Inc. published a report which argued that the company could not compete with Komatsu because the yen was unduly undervalued against the dollar and that the undervaluation was due to the highly regulated Japanese financial markets, which damaged the attractiveness of the yen. This theory of connecting trade competitiveness and financial deregulation should have been dubious at best, but, the next month, the Treasury Department was under fire within the US government for doing nothing on yen/dollar exchange rate issues.¹¹

In February 1984, the US–Japan Ad Hoc Group on Yen/Dollar Exchange Rate was jointly established by the US Treasury and the Japanese Ministry of Finance, which at the time regulated and supervised the financial sector. At the joint meeting, directors general of the Ministry read out prepared statements one after another, listing reasons why the US requests could not be accommodated. Abhorred, the US side remarked that the Japanese responses were “formidable,” but the word was lost in translation and some Japanese participants took it as praise.

The next month, the US Treasury secretary visited Tokyo to meet Japan’s finance minister and expressed his frustrations with words and physical gestures undiplomatic enough to leave no room for misinterpretation. Two months later, the Ministry of Finance published its own report, and, on the same day, the Joint Ad hoc Group released a report which considerably overlapped with the Ministry’s report.

As Kaminsky and Reinhart (1999) have shown, financial deregulation increases the risk of financial crisis across the world. The case of Japan was even more unfortunate, as Japan embarked on what it should have done on its own due to US demands rooted in dubious theory. It was not a helpful development in terms of fostering the Japanese people’s propensity to think independently about their future and design their own financial system.

The Ministry knew that deregulation required effective supervision, proper market discipline, and a reliable safety net. The Ministry’s 1984 report included plans to augment the disclosure requirements on banks and the deposit insurance system. Its 1985 report declared the need to strengthen its on-site inspection team.

The deregulation part of the plan was implemented as promised to the United States, but it was not easy to implement the plan to enhance the safety net, disclosure, or supervision. True, the Ministry did succeed in raising the deposit insurance limit from 3 to 10 million yen in 1986, despite the public opinion arguing rich people needed no protection. The Ministry also imported from the United States the purchase and assumption approach, a bank resolution method in which another bank purchases failed bank’s assets and assumes its obligations with financial assistance provided by the resolution authority. To support purchase and assumption, the Deposit Insurance Corporation was given a power to make financial assistance within the limit of payout costs.

But the Deposit Insurance Corporation long stayed a paper company. The total number of its employees was 15 even in 1995. The banking industry repeatedly and successfully lobbied against the bills which intended to amend the Banking Law to strengthen disclosure requirements. Despite the Ministry’s repeated pledge to augment its on-site inspection team, the number of inspectors at the headquarters grew from 76 in March 1984 only to 78 in March 1989, and the number at the local offices declined from 223 to 214.¹²

Before the deregulation, the Ministry was able to use its discretionary power to guide the industry and was considered highly influential. After the deregulation, however, it was left without means and tools to conduct effective supervision.

In both monetary policy and prudential policy, Japan initially resisted to the good advice given by the Unites States, then gave in, but failed to implement necessary follow-up measures—rate reversal in the case of monetary policy and enhanced supervision in the case of prudential policy—thereby sowing the seeds of future problem.

Bankers’ Existential Threat

The banking industry was feeling an existential threat. After deregulations in the capital market, large corporates started to rely on bond issuance for funding and reduced their reliance on banks. In addition, due to the appreciation of the yen, the manufacturing industry, banks’ traditional core customers, stopped constructing factories in Japan. On the other hand, bankers feared that deregulation of deposit interest rates would eventually work to raise banks’ funding costs and limit lending margins.

Banks believed that, to survive, they should find new borrowers who were prepared to pay interests at higher rates. Bankers intensified their competition in lending to the real estate sector. Figure 2.1 shows how the banks compensated for the slowdown in lending to traditional borrowers by expanding their business with the real estate-related sectors, directly or via non-bank lenders.

Fig. 2.1

(Source Bank of Japan, Loans and discounts outstanding by industry; and Cabinet office, Annual Report on National Accounts of 2010—including retroactive results from 1980–)

Bank loans relative to GDP

The new business model did not look risky, as the Japanese land market had never experienced a period of declining prices after the World War II. Banks’ profits surged. During the period, some Japanese banks weakened their traditional checking mechanisms by merging credit review departments with loan departments and by delegating more loan-approval powers from the headquarters to branches.

The following is a recollection on banking in the late 1980s that I heard in 1991 from a young banker at Mitsubishi Bank, which had the reputation of being the most conservative bank.

I was a loan officer at a branch in Tokyo for three years. The branch had total outstanding loans of around 20 billion yen when I joined and 80 billion yen when I left. It may sound like a big surge, but the growth was slower than the growth at neighboring branches of other banks. We considered the nearby Sumitomo Bank branch as our rival and compared notes with it, but almost every month they wrote more in loans than us.

The branch had about 20 loan officers. To compensate for the repayments of existing loans and to attain the net increase of 60 billion in three years, each officer had to write billions of yen in new loans per year.

Even if I established a stronger relationship with one respectable medium-sized company and succeeded in raising Mitsubishi’s share of that company’s bank debt by 10 percent, the increase would be equivalent to only tens of millions of yen. To achieve the targeted increase in loans, I would have to do this for 100 customers a year. The bank’s internal procedure for one lending decision would consume half a day of my time. I could not spend half a day for a loan of just tens of millions of yen.

You are surrounded by colleagues who lend billions of yen at a time to someone who owns land. Some customers insist that they borrow money and provide collaterals, but that the bank should never pose questions on the use of funds or the business of the companies. In the freshman education course, you learn first that a bank is not a pawn shop, but if you do not act like a pawn shop, you will be left behind. I once lent two billion yen to such a customer with much fear and trembling, but later found out that a competitor had lent a much larger amount.

On top of the lending by banks’ own branches, lending via non-bank lenders exploded during the period. The total outstanding loan amount of non-bank lenders jumped from 33 trillion yen, equivalent to 8% of bank loans, in March 1986 to 135 trillion yen, or 18%, in March 1991.

Some non-bank lenders were independent, but most were affiliated to one or more banks or insurance companies and borrowed from multiple banks and insurance companies. There were implicit assumptions that affiliated banks and insurance companies would step in if the lenders’ business should go wrong, but the exact scope of responsibility was not stipulated. The non-bank lenders were not covered by the scope of direct supervision and inspection by the Ministry of Finance. This form of shadow banking resulted in business expansion without proper governance or supervision.

Bubbles

These moves triggered the classical mechanism of asset price bubbles common to any countries. Backed by growing demand, asset prices started to rise, collateral value increased, and banks’ underwriting standards weakened. Credit expansion prompted speculative investments in land, and further increases in asset prices stimulated people’s greed. The bullish sentiment prevailed in the Japanese society. But the degree of exuberance differed between the household, corporate, and banking sectors.

Between 1986 and 1991, corporations bought 13.4 trillion yen more in stocks than they sold, whereas households sold 14.6 trillion yen more than they bought.¹³ Corporations bought, and households sold.

The pattern was similar but with a bigger scale in the case of land. During the same period, net purchases of land by non-financial corporations amounted to 60.5 trillion yen, financial institutions 18.7 trillion yen, general government 22.0 trillion yen, whereas households sold 102.5 trillion yen on net.¹⁴

Figure 2.2 shows the changes in land prices and the timing of purchase/sales by different sectors. As land prices went up, the households sold more and more, cashing in the capital gains, and the corporate sector bought more and more, sowing the seeds of future capital losses. In retrospect, it seems that households who sold high were wiser than businessmen who bought high. Unlike the US crisis in the 2000s that was originated in household debt, the Japanese crisis in the 1990s was largely the problems of corporate borrowers.

Fig. 2.2

(Source Cabinet Office, Annual Report on National Accounts of 2010—including retroactive results from 1980—; and Japan Real Estate Institute, Urban Land Price Index)

Sectoral net land purchases and land price

Banks aggressively financed land purchases by corporations. As Fig. 2.3 shows, the size of the balance sheet of the real estate industry tripled between March 1986 and March 1992. The explosion was caused by a 56 trillion yen increase in real estate holdings on the asset side and a 64 trillion yen increase in borrowings from financial institutions on the liability side. Borrowings from financial institutions reached 94 trillion yen in March 1992, but the net worth, or the industry’s own money available to cover losses before leaving losses to bankers, was as thin as 9 trillion yen.

Fig. 2.3

(Source Ministry of Finance, Financial Statements Statistics of Corporations by Industry)

Balance sheet of the real estate sector

Bankers’ lending to the real estate sector became a major source of bad loans later.¹⁵ The borrowers did not put much of their money at risk and the bankers relied on the real estate collateral that borrowers provided. However, when the borrowers’ businesses went sour, the collateral also lost value. An example of wrong-way risk. The deal was for real estate companies to enjoy the capital gains should the land price go up, and for bankers to absorb the capital losses should it go down. In retrospect, it seems that the real estate companies were wiser than the bankers.

The resultant asset price bubbles were enormous. The bubbles in Japan in the latter half of the 1980s were much bigger than those in the United States during the mid-2000s.

The size of the national capital gain in Japan during the 4-year period 1986–1989 was 4.8 times as large as its annual GDP, while that in the United States during the 4-year period 2003–2006 was only 1.6 times (Fig. 2.4).

Fig. 2.4

(Source Cabinet Office, National accounts, integrated accounts, reevaluation accounts, changes in assets; and Bureau of Economic Advisors, Integrated macroeconomic accounts, Table S.2.a Selected Aggregates for Total Economy and Sectors, lines 1 & 62–67)

National capital gain/loss relative to GDP

In Japan, stock prices peaked at levels 3.0 times as high as pre-bubble, whereas in the US stocks peaked at only 1.5 times pre-bubble levels.¹⁶ Japanese land prices rose 3.7 times higher in the latter half of the 1980s, whereas US home prices grew 1.7 times in the first half of the 2000s.¹⁷

Although the exact numbers differ depending on the choice of indices and periods to compare, it may be said that the magnitude of the Japanese asset price bubbles was about two to three times as large as those in the United States. In addition, a significant part of the credit risk taken in the United States was transferred to Europe through the sales of subprime-loan backed securities and other instruments, while Japan largely absorbed the risk on its own.

What Japan Gained and Lost

At the end of 1989, Japan was the world’s largest creditor country. The eight largest banks in the world were all Japanese. The Tokyo Stock Exchange had the largest market capitalization and the Osaka the third largest. Many believed in the valuation estimates that by selling the Imperial Palace site you could buy the whole land area of California, by selling the central part of Tokyo the whole United States, and by selling Japan you could buy the United States four times over.

Fear and despair in 1986 turned into hubris in 1989. With the emergence of windfall millionaires, national belief in the virtue of hard work and diligence was undermined. Some real estate developers paid handsomely to companies secretly affiliated with organized crime to kick residents out of building sites. The largest yakuza syndicate almost tripled its membership from 13,000 in 1985 to 35,000 in 1991.¹⁸ The harm caused by bubbles was not limited to those on corporate and bank balance sheets.

Japan tried to transform itself from an export-led economy to a domestic demand-led one, rectify its trade imbalance, and avoid trade war and hyper-appreciation of the yen. The effort had enormous side effects, but did it at least attain the initial objectives?

Both Japan’s bilateral trade surplus with the United States and its global trade surplus halved if measured in yen, and declined by 25% if measured in dollars.¹⁹ Japan’s net export to GDP ratio peaked in 1986 at 4% and declined to 1% in 1990. Japan’s gross export to GDP ratio, which reached 14% in 1984, rapidly declined to 10% in 1987 and stayed at the level for more than a decade. We may say that the aim to rectify its major trade imbalance was attained.

The yen peaked at 121 yen per dollar in November 1988 and declined to 159 yen per dollar in April 1990. Strangely enough, however, the yen started to appreciate again as the Japanese economy got weakened by the collapse of the bubbles and surged as high as 81 yen per dollar in April 1995.

The relationship with the United States continued to deteriorate as the combination of the bubble economy and the appreciation of the yen inflated the optics of Japan’s economic clout. Japan’s GDP, which was only 31% of the US one in 1984, swelled to 71% in 1995.²⁰ In 1989, Sony acquired Columbia Pictures and Mitsubishi Real Estate bought Rockefeller Center. One of the founders of Sony and an influential member of the Diet jointly published a book titled The Japan that can Say No and proposed to use Japan’s advanced technology as a source of military power. The title of the book sounded bold and rebellious, as it was taken for granted for many Japanese that Japan could never say no to any US requests. In 1990, Matsushita Electronics purchased Universal Pictures.

The sources of US concern on Japan proliferated from the trade issues to cultural invasion and national security. In 1989, the Atlantic Magazine, with the cover page depicting a giant sumo wrestler looking down at a small globe, carried a cover paper by James Fallows titled “Containing Japan,” and the Newsweek magazine ran a front page with the picture of the Columbia lady wearing kimono and the caption “Japan Invades Hollywood.” The 1992 novel by Michael Crichton Rising Sun and 1993 movie starring Sean Connery of the same title portrayed the criminal approach a fictitious Japanese company took to dominate American business and influence US politics.

The ratio of Americans who responded yes when asked if Japan is a dependable friend further declined from 48% in 1988 to 44% in 1990 and 1991. The ratio started to pick up in 1992 and reached 84% in 2011. By the time, after the two decades of economic stagnation, Japan had become insignificant as a potential competitor or a threat to the United States.

Notes

• 1. Volcker and Gyohten (1992).

• 2. Nihon Keizai Shinbunsha (2001).

• 3. Ibid.

• 4. For more on the harm of unfounded visions, see Yoshikawa (2001).

• 5. For photographs of these extraordinary projects, see Tsuzuki (2006).

• 6. Remarks of an anonymous high official of the Bank of Japan and an interview with Kiichi Miyazawa (Nihon Keizai Shinbunsha 2001).

• 7. Telegram from the ambassador to the United States to the minister of foreign affairs dated May 1, 1987 (R064534).

• 8. Telegram from the ambassador to Italy to the minister of foreign affairs dated June 9, 1987 (R085905).

• 9. NHK Shuzaihan (1996).

• 10. Telegram from the ambassador to Italy to the minister of foreign affairs dated June 9, 1987 (R085905).

• 11. For the detailed depiction of the interactions between the Japanese Ministry of Finance and the US Treasury, see Takita (2006).

• 12. Banking Bureau (1984) and (1989).

• 13. Stocks listed in the first section of the Tokyo Stock Exchange.

• 14. Cabinet Office, National Account of 2008.

• 15. In March 2002, 36% of major banks’ non-performing loans were to the real estate industry and 25% of their lending to the real estate industry were non-performing (Bank of Japan 2002).

• 16. Nikkei Stock Price Index on December 29, 1989 compared with that on December 31, 1985 for Japan and Dow Jones Industrial Average in September 2007 compared with that in February 2003 for the United States.

• 17. Commercial land price index for six large cities in September 1990 compared with that in September 1985 for Japan and S&P/Case-Schiller 20-city Home Price in April 2006 compared with that in February 2003 for the United States. These indices were chosen as the commercial land price bubble was the key driver for the Japanese financial crisis whereas the residential real estate price bubble played the central role in the United States.

• 18. National Police Agency (2007).

• 19. Measured in yen, the bilateral surplus peaked at 9.4 trillion yen in 1985 and bottomed at 5.1 trillion yen in 1991, and the global surplus peaked at 14.2 trillion yen in 1986 and bottomed at 6.5 trillion yen in 1990. Measured in dollars, the bilateral surplus peaked at 57 billion dollars in 1987 and bottomed at 43 billion dollars in 1990, and the global surplus peaked at 92 billion dollars in 1988 and bottomed at 69 billion dollars 1990.

• 20. World Bank, World Development Indicators database.