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BIPR | Kabutoch͞͞o's Autopsy: The Plaza Accords, Asset Bubbles, and The Japanese Lost Decade
Kabutoch͞͞o's Autopsy: The Plaza Accords, Asset Bubbles, and The Japanese Lost Decade

Michael Portillo, M.A.I.R. student ’24 from the D.C. Metro Area.


The Japanese "Lost Decade", spanning from 1991 to 2005, was a turning point in Japan's economy. Once poised to overtake the U.S. as the largest world economy, Japan suffered over ten years of stagnant economic growth, a hobbled banking sector, and a dramatic drop in asset prices that it has not since recovered from.

This paper constructs a narrative that explores the role an overvalued dollar, the 1985 Plaza Accords, and Japanese governmental structure played in the crisis. It pays particular attention to the powerful Japanese Ministry of Finance's role in the crisis. Namely, the Ministry's ability to unilaterally command a subordinate Bank of Japan, its failure to identify an asset bubble quickly, its insufficient regulation of the financial sector, and its role in creating zombie firms during the first half of the "Lost Decade".

This paper concludes that, in the absence of domestic pressures (inflation/unemployment) or international pressures (balance of payments crisis/capital flight), the Japanese Ministry of Finance decided not to take sufficient action to address the "Lost Decade's"underlying issues. In turn, this inaction led to a years-long banking crisis. Japan only began to recover from the crisis when the Japanese legislature faced sufficient political pressure to split the Ministry of Finance into three independent entities for fiscal, monetary, and regulatory policy. This split allowed Japan to enact policies which brought problematic financial firms into regulatory compliance and recapitalized struggling sectors. Furthermore, while the Plaza Accords were responsible for Japan's fiscal expansion, monetary expansion, and currency appreciation, these factors did not necessarily lead to Japan's banking crisis. Data from the Federal Reserve Bank of St. Louis, the World Bank, and publications from Japanese economists are used throughout the paper to support these conclusions.

Lessons from this episode in economic history may be especially applicable today regarding the U.S.-China trade war and questions of future international economic cooperation between advanced economies.

Michael Portillo is a MAIR student '24 from the D.C. Metro Area. He earned his B.A. in economics from Virginia Commonwealth University and studied Mandarin Chinese at National Taiwan University's International Chinese Language Program. His research interests include Central Banking, Economic Inequality, and Autocratic States and he has professional experience in economic research, finance, and diplomacy. After graduation, Michael will join the U.S. Foreign Service as part of the Thomas R. Pickering Fellowship.

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