In 1998 Japan produced less than it did in 1991. Between 1953 and 1973, Japan in the space of two decades became the world’s largest exporter of steel and automobiles. However, in the early 1970 growth slowed from the record level growth of 9% too less than 4% after 1973. Bank loans and import licenses flowed to favor industries and firms; the economy’s growth was at least partly channeled by government’s strategic designs (MITI). The second factor influence Japanese affluence was keiretsu. Members of the Japanese keiretsu – a group of allied firms organized around a main bank – typically owned substantial quantities of each other’s shares, making management largely independent of the outside stockholders. However, if the loans looked unstable, wouldn’t the banks start lose depositors? But in Japan, depositors believed the government would never allow them to lose their savings. One by one the Japanese government targeted strategic industries that could serve as engines of growth. The strategy was to create an export drive that initially ignored profitability and meanwhile built market share and at the same time drove foreign competitors into the ground. The Japanese government was accumulating massive debt in a race to the top. At the beginning of the 1990s, Japan hot economy was experiencing a speculative real estate boom. Speculative investments in real estate almost caused a banking crisis in the 1970s.

Moral hazard occurs when one person assesses the risk of an endeavor and causes another person to bear the cost if things go badly. Borrowed money is inherently likely to produce moral hazard. Heads I win, tails you lose. Japanese banks forget normal placed restrictions on what borrowers could do with the loaned money and reduced or eliminated owner capital requirements. These banks loaned large sums of money, no questions asked. Investors in the bank had become careless about where they were storing their money. The depositors were not asking questions about the bank investment; instead, they were relying on the government to safeguard their investment. Bank Deregulation opened up more competition for public savings and increased freedom to make bad risk investments. Competition further eroded profit margins for banks to cling to old-fashioned ways of doing business. The bank loaned more and helped inflate the Japanese bubble economy. In 1990, the Bank of Japan raised interest rates and the air started to stream out of the bubble with land and stock prices dropping 60% below peak. “Japanese authorities seem to have regarded all of this as healthy-a return to more sensible, realistic asset valuations.” Instead a deepening economic malaise was setting in: unemployment hitting 10% and historical GDP contraction. Analyst called the phenomena a “growth recession”, “liquidity trap”, or “growth depression”. Japan manufacturers were increasing producing, inventories stock piling, and consumer spending lagging. Spending was not keeping up with production. In 1996, Japan’s Finance Ministry was running a 4.3% of GDP deficit. Japan was experience a baby bust and its working-age population were declining. The retired citizens were a heavy fiscal burden on the Japanese government. In 1997, Prime Minister Ryutaro Hashimoto increased taxes to reduce the budget deficit. The Japanese economy plunged into a recession. The debt to GDP ratio was 100% but the investors maintained faith in the long-term soundness of the Japanese government. The Japanese banking crisis paralleled the 1930-31 banking crisis inflicted by long-term damage to credit markets. Credit was not available, even when quality opportunities presented it. The market was starved for money. The eight-year stagnation was a time for repentance.

2000s, inflation caused by factors, such as, high-energy prices caused Japanese investors to sell Yen and buy dollars. The sudden rise in the Japanese stock market suggested an surge in speculative spending and rise in the overvaluation of the Japanese stock market. The Japanese market depended on US consumption and US consumption depended on cheap Japanese products and massive levels of credit. As the Japanese economy inflated Yen bought less domestic products and a save haven needed to be found. One haven was buying dollars, if the yields remained high enough for the risk. High yield investments in US Treasurer notes made overseas investment became attractive. Low yield Japanese bank notes had no holding power. The selling of the yen made Japanese products cheaper for foreigners too buy and foreign goods expensive. “The yen must, as a matter of sheer accounting, fall enough to match that trade surplus to the desired export of capital”. Demand for Japanese goods would rise to a certain balance point. However, if the dollar was expected to fall then dollars converted back to yen would return less yen. The Japanese saver will be less enticed to transfer savings into overseas investments, if on the dollar/yen conversion a profit was not realized or if the Japanese investor believed a loss in the future was likely on the exchange. Therefore, Japanese savings would not be exportable without confidence in a save return, savings that fueled consumption.

Inflation drove Japanese money out of the country into higher US treasury yields, which promised foreign investment a safe return back. The Japanese foreign investment fueled the consumption of Japanese products: electronics, computers, steel, and automobiles. The stock market and real estate markets reflected behavioral and quantity factors that represented various levels of productivity, consumption, speculation, and confidence. However, rising interests in America would cause Bank of Japan to raise its rates, to bridle domestic inflation and slow down the exodus of yen and both side could move rapidly into a depression.

However, hedge funds could cause another scenerio to materialize. Historically, as inflation increased and the dollar devalued, US investors sought to put money in hedge funds seeking double digit returns investments in emerging markets. Some speculators borrowed new cheap Asian money and invested in higher yield US securities others reaped the benefits of hot money. Hedge funds seemed content to remain positioned in emerging markets, as long as US consumption remained strong. When foreign Asian markets becoming uncertain about the future panick set in. Panick was fueled by fears that US inflation will rise and US consumption decrease. This was a worst case scenerio because Asian markets were in the business of production not consumption and any changes in expectations of consumption could have massive impacts. The hedge fund remained root while profits were within the acceptable threshhold but as profits drops so did their confidence wain and these hedge funds could flee out of Asia back into US securities. The sudden increase in available liquidity would cause a surge in borrowing and business growth,further inflating the economy, drive down interest rates, and inflate the stock market. The surge in market capital in the stock market will cause a job boom, until balance is achieved then a massive depression will set in, lasting about 20-30 years.