Chapter 4: The Burst of Bubble and Political Economy of the 1990s Depression

The Japanese economy changed its features in the 1990’s, compared with the 1980’s. It shifted down to an extremely lowered growth trend. Its continuous depression with economic difficulties has gathered international concern among the advanced countries. Among the major causes for such difficulties were clearly the swell of huge bubbles in speculative trading of shares and real estate in the late 1980’s and the in subsequent collapse. They brought an enormous amount of bad loans to the Japanese financial institutions generating credit crunch, deteriorated assets of firms and households, caused continuous business failures, and a vicious circle of asset deflation. We saw the swell of bubbles by mobilizing the expansive flexibility of the credit system and the resultant destructive burst of them not seldom in the history of capitalist economies. There were for example, the burst of bubbles in the tulip crisis of 1637 in Netherlands and the South Sea bubbles incident in 1720 in the UK already in the nascent period of capitalism, the cyclical crises in the 19th century, or the great crisis beginning from 1929. In the capitalist world economy since the late 1980’s, the possibility in capitalist economy to cause speculative bubbles and their burst strongly reappeared. The Japanese economy could not escape it. Such a process of burst of speculative bubble may be understood at a certain abstract level by H. Minsky’s postKeynesian financial instability hypothesis.1 According to this hypothesis, most of firms and individuals in the Japanese economy in the late 1980’s must have started from the position of hedge finance, in which the cash flows from assets in position are expected to exceed the cash flow commitments on liabilities for every period. Then more and more of them moved to speculative finance, in which the cash flows from assets in the near future term fall short of the near term contracted payments, but the expected cash receipts in the longer term are expected to exceed cash payments that are outstanding. Further at the last phase of speculative development, increasing number of them came to Ponzi finance, in which the net income from receipts falls short of interest payments in both the short run and the long run, so as to increase outstanding debt, expecting a future bonanza as a solution. However, the general possibility for a capitalist economy to cause bubbles and their burst, or the hypothetical logic of process of events is obviously insufficient fully to explain the characteristic process and the size of destructive damage of financial instability in the Japanese economy in this period. We have to reconsider also the