Question

Bubble economy of Japan time period 1985-1990. Everything Japan couldve/shouldve done to prevent the bubble economy from forming or what they could've done to stop the growth of the asset bubble. Where did they go wrong when trying to stop the bubble economy from forming.

Answer 1

The bubble economy in Japan was formed due to increased asset prices and higher economic activities . These higher economic activities and boom led to credit expansion and higher speculation. This overconfidence and reckless speculations in the stock market proved to be the cause of financial crisis in future .

Japan's post war booming economy led households to save more which in turn meant more deposits by banks and more lending due to it . This lending turned to lenient lending which proved to be a problem in later years. Had they not opened up the lending this way , which led to excess liquidity , the economy of Japan would not have faced so much of crisis. Banks took more risks because most of the funding was done by the Yen from capital markets, combined with this was the loose monetary policy.

As discussed above, the higher risks and loose policies led to higher speculations. This raised the prices of assets and the overall economy to new heights which later led to the crash and crisis. The Bank Of Japan was too lenient in its monetary policy and allowed excess lending. Also the delay to identify the problem of increased asset prices and take delayed action on behalf of Bank Of Japan was the primary reason of the bubble economy being formed .

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