What happened to Japan’s economy? As recently as the 1990s, it seemed that everybody in the business community and the media was talking about successful Japanese management techniques. The country was on a roll. Japanese firms were either buying out well-known companies in North America (e.g., Hollywood) or setting up operations here (e.g., automakers) that were models of efficiency.

However, there were (and in many cases, still are) rigidities within Japan itself that caused the nation’s business success to implode. The starting point was a speculative bubble in commercial real estate prices. When these could no longer be sustained, other factors prevented the economy from righting itself and the result has been 10 years of virtually no growth, even with real (inflation-adjusted) interest rates at 0%.

What were the rigidities? For starters, it was common for Japanese corporations to have ownership positions in Japanese banks and for the banks to have major equity positions in the corporations to which they were lending money. This is not a formula for objectivity.

When real estate prices collapsed, firms that should have gone under were allowed to continue in operation. A heritage of putting on a good front delayed necessary adjustments way past their “stale date”. Bad debt at the banks just continued to accumulate.

A final reckoning always has to be made. This may well involve an ugly collapse or two.

Then other structural barriers compounded the problem. I’ll pick up the discussion again tomorrow.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News.

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