Section 1. The Post-bubble Japanese Economy and Domestic Market

Item 1. The Domestic Economy After the Collapse of the Bubble Economy

Prolonged slump and progressive appreciation of the yen

The collapse of the bubble economy began in 1991 and was followed by a prolonged period of stagnation in the Japanese economy. What triggered the collapse was a directive sent from the Ministry of Finance to financial institutions at the end of 1990 instructing them to limit the total volume of real estate loans and an accompanying request to reveal the true extent of loans to nonbanks and the real estate and construction industries.

From around the end of 1991, the fall in land prices that had already begun especially in the Tokyo area spread nationwide. The Nikkei stock average, which had reached an all-time high of 38,915 yen at the end of 1989, fell below 20,000 for a time in October 1990 and in August 1992 crashed below the 15,000-yen level. Moreover, as the minimum bank capital adequacy ratio of 8 percent stipulated by the Bank for International Settlements was applied to Japan's major banks from the end of fiscal 1992 (ended June 1993), financial institutions hit by the lowering of the capital adequacy ratio switched to a policy of refusing or withdrawing loans. Business failures reached the highest level ever, inflating the bad loans of financial institutions and creating a vicious circle.

Poor corporate performance became a prominent issue and excess in three areas-debt, facilities, and employment-emerged as factors that were stifling business. Layoffs of surplus personnel taken on during the bubble period became common and the term "restructuring", originally referring to the rebuilding of a business, became a regular term for staff redundancy. The automotive industry also found itself in a serious situation, with a number of enterprises making the decision to implement layoffs in the autumn of 1993 after receiving a so-called "employment adjustment subsidy". In the same year, Nissan Motor Co., Ltd. decided to discontinue vehicle assembly at the Zama Plant in Kanagawa Prefecture from 1995. This was part of an emerging move to cut back on excess capital facilities.

Even as domestic demand went into a marked slump due to deteriorating corporate performance and the worsening employment situation, there was an inexorable appreciation of the yen from 1993, which impacted the exports that were the lifeblood of the Japanese economy. This was because, even after the collapse of the bubble economy, Japan continued to run a positive trade and current account balance, which caused a burgeoning demand for purchase of the yen, including from speculators. The dollar exchange rate fell below 100 yen for the first time in June 1994, sank into the 80-90 yen range in March 1995, and on April 19 plunged to an all-time low of 79.75 yen on the Tokyo foreign exchange market. Considering the situation to be serious, the Japanese government intervened in the market having secured the cooperation of the U.S. government, and from October 1995 the dollar returned to the 100-110 yen range.

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