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Japan's Lost 30 Years: How Did It Start?

Many people trace the beginning of Japan's "Lost 30 Years" back to the Plaza Accord of 1985. At the time, Japan's economy was booming, driven by exports of automobiles, electronics, and industrial products. The Japanese yen traded at around 240 yen to the U.S. dollar, making Japanese goods highly competitive around the world.

 

The Plaza Accord was an agreement between the United States, Japan, West Germany, France, and the United Kingdom to reduce the value of the U.S. dollar. As a result, the yen rapidly strengthened, eventually reaching nearly 120 yen per dollar. This made Japanese exports more expensive and raised concerns about economic slowdown.

 

To keep the economy growing, Japan lowered interest rates and encouraged lending. Money became easy to borrow, and investment poured into stocks and real estate. Asset prices soared to extraordinary levels. At the peak of the bubble, some estimates claimed that the land under the Imperial Palace in Tokyo was worth more than all the real estate in California.

 

The bubble could not last forever. In the early 1990s, stock and real estate prices collapsed. Banks were left with bad loans, businesses reduced investment, and consumers became cautious.

 

While economists still debate the exact causes, many agree that the combination of a rapidly rising yen, easy-money policies, and the bursting of the asset bubble marked the beginning of Japan's long period of slow growth known as the "Lost 30 Years."