Japan: From Threat to Threat? Part II

7: Why did the bubble burst?

What has become known as the lost decade was – seen on the surface – created by an enormous amount of bad loans (bad credit rating and borrowers with low solvency) in combination with falling property prices. More fundamentally related to the crisis

• a banking system that had been turned into a huge capital injection into the growing Japanese industry
• that this industry had matured and no longer had such a great need for capital
• that spare capital in large quantities thus found its way over to the real estate and stock markets.

In retrospect, we can say that the Japanese development model was at the forefront when it came to reclaiming other developed countries. The combined

• a large and protected domestic market
• highly qualified and educated – yet docile – workforce
• easy access to money (poor credit rating) from hyperactive banks in pairs with
• a particularly competent elite bureaucracy with good antennas for what was happening in other advanced countries and for necessary adaptations of the Japanese economy.

The problem was that as soon as Japan reached the West again, there was no longer any model to follow, and the bureaucracy lost the ability to rent. Japanese exporters became rich and trong no longer borrowed much capital from the banks. The money was then spread over the entire economy to contribute to the speculation bubble in the next round. At the same time, domestic interest groups gained more power, which made it more difficult for elite bureaucrats to direct the economy and resist demands for protective measures. Behind the strong economic growth in the decades before 1990 was an increasing division of the economy into particularly competitive export sectors and more and more inefficient importers and other sectors.

The lost decade – which lasted until approx. 2003 – was therefore a deep systemic crisis for the Japanese economy. It took a while before people caught sight of this lightness. It was therefore not until the end of the 1990s that most people really realized how deep the economic problems were. One then realized that fundamental reforms were needed to get the economy back on track. It was also only now that “everyone” realized that Japan could no longer be seen as a threat. In fact, from now on, Japan was seen as a danger rather than a threat – with economic problems that could drag others into the lurch.

8: Reduced international status

When economic prosperity completely reversed in the 1990s, the country also lost international status. Not least in the economically prosperous Asia, the status was weakened. Japan was certainly in the driver’s seat at the beginning of the 1990s. The country’s economy was worth more than the combined economy of all other East Asian countries, including China. The continued economic dominance had given Japan the confidence to take the lead in the region – albeit in a quiet way. Assured of its strong economy, Japan looked forward to using its economic power to persuade a weakened Russia to return certain northern areas (four islands and some islets in southern Kurilane), and normalize relations with the economically crippled North. Korea in an advantageous way.

In the early 1990s, the great fear in East Asia was that Japan would move in and fill the power space after the Soviet collapse and the reduced American military presence – after two superpowers “on their way home”. This fear revived historical memory and Asian threats about Japan – notions rooted in brutal invasions and occupations of large parts of the region until 1945. When neither the United States nor the Soviet Union would stop Japan, a country located in Asia according to countryvv.com, the image of a «Japan- ghost ”to grow among many Austrians.

9: Change of power

As the 1990s progressed and the Japanese economy continued to stagnate and the Chinese to grow, fears in neighboring countries waned. What really took off in the early 1990s, and which has lasted until today, is therefore a major shift of power from Japan and over to China. As early as the mid-1990s, China had become the leading trading partner for most countries in East Asia, including Japan itself. One sign that luck had turned is that China passed Japan as the country with the highest trade surplus in trade with the United States. Today, the Japanese surplus is small compared to China’s. Japan is no longer the main economic threat to the eyes of Americans who demand protective measures for their economic interests.

Chinese growth and Japanese stagnation have contributed to weakening Japan’s self-confidence while fueling fears among other Asians of the “new Japanese threat” – the Chinese. More than the economic turnaround, this has challenged the Japanese self-image as the “natural economic leader” in the region. The problem was exacerbated by the dictatorial nuclear power of North Korea. In one day, North Korea managed to puncture Japan’s illusion of being invulnerable and superior to all the surrounding countries. On August 31, 1998, North Korea launched a two-stage Taepodong rocket that flew over northern Japan and landed in the Pacific Ocean east of Japan.