June 24, 1997
Why did Japan's economic bubble burst in the early 1990s? Some analysts say the debacle was the result of pursuing policies in which government bureaucracies removed or controlled a substantial part of the risk inherent in a market economy.
This policy, they say, fueled Japan's seemingly miraculous economic recovery and expansion after World War II -- but it also led to economic collapse in the long run.
- After the war, New Deal social engineers -- courtesy of the U.S. -- pushed the country into a form of bureaucratic economic management, including setting production targets, government allocation of resources, preferential allocation of scarce foreign exchange to buy raw materials and U.S. equipment, and preferential tax treatment for favored industries.
- In the late 1950s, the government's Ministry of International Trade and Industry (MITI) and the Ministry of Finance channeled huge resources into the privately-owned steel industry -- giving it most-favored industry status.
- Following the 1973 oil shock, MITI decided Japan had to change its industrial structure -- shifting from energy-consuming production to more value-added and knowledge-intensive industries like electronics and auto making.
- Astonishingly, however, government planners tried to discourage Sony's growth and urged Honda and other future car giants to stay out of the auto industry!
From the 1950s through the 1980s, disproportionately more and better resources, money and labor were allocated to export-oriented industries. Fewer resources were allocated to domestic and consumer industries.
Expecting that government would support or bail them out, investors and managers plunged into increasingly irrational real estate investments without regard for reasonable expectations of returns. Similarly, the securities industry -- also expecting government to bail them out if worse came to worse -- plunged into stocks and entered into illegal verbal agreements with investors guaranteeing a fixed return on stocks above the interest rate on bonds.
Worse yet, analysts say, the Bank of Japan supplied money to fuel hyper-speculation in the real estate and equities markets in the 1980s.
And then the 1990s and the days of reckoning arrived. Total asset values suffered a loss of close to $10 trillion during the first half of the 1990s -- equivalent to Japan's estimated economic loss from World War II.
Experts say that Japan's big-time success and failure -- like those of history's other great adventures in controlled economies -- serve as one more cautionary tale for countries tempted to take that route.
Source: Takuma Amano and Robert Blohm (both investment bankers), "Japan's Economic Miracle Is Still to Come," Wall Street Journal, June 24, 1997.
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