Recession 1987-1990

Background Information

In 1981, former president Reagan Ronald proposed "small government" and "strong Dollar" policies. In order to combat recession. The US government had deficits every year since 1961 until it inherit the government to Reagan Ronald. He dramatically cut income taxes from 70 percent to 28 percent for the top tax brackets. At the same time, the president also reduced the money supply by doubled the federal funds rate to 20%. Despite all strategies the double digit inflation decreased but the Budget deficit kept increasing and the deficit of the trade balance also increased. The double deficit is also known as twin deficit. This background lead the government to lower the price of dollar.

Plaza Accord 1985

This accord was signed between finance ministers of the G5 nations: The United States, United Kingdom, France , west Germany and Japan. The main purpose of the accord was to reduce dollar currency by corporation among countries due to the situation as mentioned in previous post. The United States aimed to grow foreign trade power and combat deficit in trade balance.

Source: the balance

This table shows the economic conditions why the plaza accord was necessary for the US.

Result

After approval of the accord , one dollar was 215 yen, decreased about 20 yen within one day (one USD= 113 JPY in Dec/15/18 for comparison) This quick fall of dollar was continued and in one year the goal was achieved. The following graph shows the rapid fall of the dollar.

Source: mo-ney

Development and impacts on Japan

The financial crisis in Japan from 1987 to 1990 was the impact of the burst of a bubble. This bubble consisted in increasing prices of real estate (increasing of 92%, that is nearly the double of prices before the bubble) and stocks and a superior economic growth.

You can subdivide the crisis in four stages:

In the years before the burst of the bubble (1985-1986) the economic growth in Japan stagnated after a previous boom. This was caused by a nominal reassessment of the Yen due to the Plaza-Accord in 1985. Five countries including Japan were gather in New york and sign the Plaza Accord (explanation of the Plaza Accord see above).
After the Plaza Accord the japanese bonds, stocks and currency decreased. This trend is called triple decrease. The key interest rate reaches a really low point of 2.5%.
Because of the low interest rates people start to invest in real estate and banks approve more loans, especially to japanese companies.
Two years before bursting of the bubble the economy is in a stadium of overheating because more and more loans are approved by banks. The central bank tries to compensate this development in form of increasing the key interest rate to 6%.
The burst of the bubble takes place after 1990 and causes the financial crisis in Japan. The banks are not willing anymore to approve that much loans and the economy suffers. The key interest rate was decreased once again by the central bank to help the economy. After the burst of the bubble the prices of high real estate and of the stocks dropped down really strong. The financial crisis caused costes of 750 billions of dollars, that is an amount of 15% of the GDP of Japan. In comparison with the worldwide financial crisis in 2007/2008 the crisis in 1987 to 1990 hit primarily Japan itself. (Banks held the loans and didn't give it to investors in form of bonds, means the banks had to carry all the risk) That is the reason why Japan needed a really long time to recover.

Source: The World Bank

The graphic shows the export-rates in percent of the GDP in Japan in the years 1980 to 2000.