Japan's Economic Rise and Fall: Lessons Learned

Japan's weakening Yen attracts more US visitors due to its 38-year low against the dollar, impacting travel and global economics.

### The Rise and Fall of Japan's Economic Power: How the Yen's Collapse and Lessons Learned Impact Us
* 💴  The Japanese yen is currently at a **38-year low against the US dollar**, leading to a **surge in American visitors to Japan** due to the **favorable exchange rate**.
* 🇯🇵  In the 1980s, Japan's economy experienced rapid growth, with **land values skyrocketing** and Japanese companies becoming **global leaders in technology and manufacturing**.
* 📉  The Plaza Accord in 1985 forced Japan to **deregulate and strengthen the yen**, making its exports less competitive and leading to **economic recessionary pressures**.
* 🎈  The deregulation and loose monetary policy created a **massive asset bubble in Japan**, with stock prices **soaring to unsustainable levels**.
* 🪂  When the bubble burst in 1989, it marked the beginning of Japan's "Lost Decades," characterized by **stagnant economic growth, deflation, and financial instability**.
* 👵  Japan's aging population, with **one of the highest life expectancies and lowest birth rates in the world**, poses a **significant challenge to its economic future**.
* 📈  The Bank of Japan recently raised interest rates for the first time in 17 years, **exiting its long-standing negative rate policy**.
* 🏦  According to economists, the lessons learned from Japan's experience include the importance of **adopting a tighter monetary policy**, **strengthening regulatory oversight**, and **diversifying the economy away from export dependence**.

the Japanese yen is now trading at a 38-year low against the US dollar. That's why the number of Americans coming to Japan has skyrocketed, with more than 900,000 people coming in the first 5 months of 2024 alone, a 17.4% increase from last year. That's also why you might be seeing Japan everywhere on social media right now. The weakened Yen has made Japan an even more attractive place to visit because $1 will now get you roughly 160 Yen, and the last time that was the case was around May of 1986, or almost 40 years ago. Everyone is trying to get a piece of Japan right now. But what's interesting is that not that long ago in the 80s, it was Japan that was buying the United States. Some of the things Japan bought included the famous Pebble Beach Golf Resort in California, the Firestone Tire Company. Japan's Sony Corporation was able to buy CBS records, Columbia pictures, MGM, United Artists, the IC Chrysler Building in New York City.

and Universal Studios Japan's economy got so big that people started to worry. Japanese investors were buying too much of everything. Japan got really close to overtaking the US economy, and how they were able to do all that is a super interesting story. One of the things that made this possible is land values in Japan started to explode. A small office space in the district of Ginza, for example, sold for 1.5 million million for 1 square meter. And that works out to a little over [Music] $139,000 per square foot. Just for comparison, last year the US national average was about $23 a square foot. But a more apples-to-apples comparison would be an area in San Francisco, which right now is valued at $5,450 a square foot, which is outrageous but still a far cry away from $139,000. That also meant the Imperial Palace in Tokyo was hypothetically worth about $852 billion, which at the time was worth more than the entire real estate of California. It was said that Japan's

land value and the office spaces in it in the most expensive District. The District of Ginza were valued at $5.1 trillion, which was about the size of Japan's entire GDP in 1989. And remember, that's for a country that's 26 times smaller than the United States. And that's just real estate. Japan's stock market was worth more than the entire value of US real estate times 4. The Japanese economy was on such a role that in the year 1995, the Chicago Tribune wrote Japan may still surpass the United States to become a leading economic power by the year 2000. And that's not that long ago, but that didn't end up happening. Instead, what happened was arguably one of the biggest bubbles to ever pop in economic history. So in today's video, I want to show you how Japan almost took over the entire world, why they didn't, and how the Yen has been collapsing over the last few decades, and what we can learn from it, and how all of this affects us.

with that said, let's get into it. Hi, my name is Andre J. Hope you're doing well. Come for the finance and stay for macroeconomic history. So, to understand Japan and the decline of the Yen, we have to rewind and talk about how Japan became so powerful. Because after World War II, Japan experienced something people call the economic miracle. And how the world saw Japan changed a lot in the 1950s. For example, if someone picked something up and they saw it was made in Japan, they would have automatically assumed it was bad quality. And you probably knew that, but maybe you forgot, unless you recently watched Back to the Future. No wonder this sea fail, it says. Made in Japan. What do you mean, Doc? All the best stuff is made in Japan. Unbelievable. That's because Japan made a lot of progress by the time of Marty's 1985. And that was thanks to Tak Henry Saku. Ultra low interest rates. Between the 1950s to the 1980s, Japan's economy grew like crazy. And Japan became an

extremely wealthy country. Japan invested into its own growth, focusing on creating high tech like VCRs, the Walkman, companies like Sony, Honda, and all their super reliable cars started to transform the global economy. Everyone wanted to own a product from Japan. By the 1980s, Made in Japan was associated with high-quality, cutting-edge technology that was actually affordable. And one of the biggest reasons for this change in perception is because the Central Bank of Japan was strategically keeping the Yen weak. A weak Yen made Japanese goods cheaper for other countries to buy. And when stronger currencies were buying, Japanese companies could convert those foreign profits like US dollars for a lot more Yen. And that created a lot of wealth, especially for the companies making all that stuff. And that's why the Japanese stock market went way up, which also resulted in full employment and good wage increases. Japan's economy was on a roll. But then the president of the US, Ronald Reagan, Ronald Reagan the actor, Ronald Reagan, decided to devalue the dollar in order to make the US more

competitive as well. And that was the birth of something called The Plaza Accord because Jesus also had a Honda for he did not speak of his own accord. Just kidding, seeing if you're still awake. Now the G5 Nations, which included Japan, the United States, the UK, France, and Germany, all got together to agree to this Plaza Accord. And the goal was to devalue the US dollar. And one of the ways they did that was by forcing Japan to deregulate in order to stimulate private sector growth. Now, whenever you hear the word deregulation, just remember that investors will probably be printing tendies soon, AKA they're going to make a lot of money. But it can also mean that if people are not careful, it's one of the special ingredients for creating an economic bubble. Because what deregulation eventually did was it made the Yen so strong that it made Japan less competitive on the international market. Their products became more expensive in relation to other currencies. So Japan started to make less money. And that created recessionary.

pressures for Japan. So, to avoid a possible recession, Japan focused on strengthening its domestic economy. In other words, they wanted to make sure that people had an opportunity to make more money at home since they were making less money overseas. And the way they did that was by increasing the marketability of Securities by creating as many investors as possible. And the way they did that was by adopting what's called a loose monetary policy and expanding credit. Japan made it really cheap to borrow money by dropping the discount rate from 5% in 1985 to 2 1/2% by 1987. The amount of money in the system, as measured by M3, went up by 141% from 1980 to 1990. And with all this money in the system and easy access to cheap credit and low-interest rates, meant people started to leverage or borrow money so that they could invest. And that's what created a giant bubble. I realize it's kind of complicated so if I put you to sleep here's a visual analogy.

of what the Plaza Accord really did. The Japan hey, look what I found more pancakes. Let's speed it up. Pancake, pancake, eat little buddy, eat, eat. [Music] Eat. You get the idea. It created a peak for Japan's economy. If you wanted to make money fast, you had to invest your money in the market, and it was in the market where you could not lose. Let me just show you how thick some of these pancakes were because from the year 1981 to 1991, whenever a company would launch or IPO, the first day's average returns in that 10-year span was 32%. Remember, the stock market today, like right now, returns anywhere between 7 to 10% per year on average, not 32% every time a company IPOs for 10 years straight. So people started buying blindly. In 1987, for example, literally blindly, as many as 10 million people applied to buy shares in a telecom stock before even knowing what the valuation would have been. That stock went up 200

times price to earnings ratio and was valued at $376 billion. Which, at the time, meant that one company was worth more than Germany's and Hong Kong's entire stock markets combined. Stock prices started to go up three times faster than corporate profits. Some stocks started to trade between 100 to 400 times price to earnings ratios. But then it all reached a peak in 1989. The Japanese stock market hit 225 times PE on average, and that's really high when you remember a healthy PE should be 10 times less than what it was. By comparison, the highest the US market ever reached during the financial crisis was roughly half of that. The Japanese stock market got so big it was worth about half of the world's entire stock market, about $4 trillion. And the interesting part about it was that it wasn't just a bubble created by ordinary people and their greed. It was hugely contributed by corporations that adopted a mentality economists like to call Tina, which stands for there is no alternative. It means companies were making more money from the capital gains on their

real estate and stock holdings than they were from their actual business, and that forced a lot of them to continue borrowing and buying more. It's estimated that about 38% of real estate was bought by corporations, and by 1980, about 2/3 of the entire stock market was owned by corporations. Because the Plaza Accord focused on deregulation, a lot of the speculation that fueled all of this growth was funded by these unregulated shadow banks. So eventually, the party had to come to an end. When the property values collapsed, when the stock market bubble popped in the early 1990s, the Central Bank of Japan had to step in and stop the bleeding. The way they did that was by slashing interest rates to nearly zero. The Bank of Japan started to inject money into its failing banks, which created zombie companies that could not repay their debt, and they had no money for capital investment. The reason Japan didn't let them fail is because they didn't want businesses to close and for people to lose their jobs.

so they continued to pump money into the economy, but it was too little too late. The trust was lost, and this period of time became known as The Lost decade. Now if you look at Japan's stock market, you'll see that it actually lasted for three. It was three loss decades because it wasn't until recently that Japan's stock market recovered to the same level that it was way back in 1989. Money was leaving Japan because there was no reason to park your money in a stock market that wasn't performing, and the safe option, which was the bond market, wasn't that attractive either because interest rates were still extremely low. At the same time, this was happening though, China's economy was starting to do some crazy things. China was starting to allow companies to relocate production to their factories, and that made Japan's economy even worse. That's because China is a lot more competitive in terms of labor cost. It's a lot lower than anywhere in the world, and although some companies from Japan took advantage of this cheaper Chinese labor, it still wasn't enough between

1990 and 2003, 212,000 companies went bankrupt. In the same period, the stock market dropped by 80%, land prices in the major cities fell by up to 84%. When all was said and done, it's estimated that the Lost Decades cost Japan 17 million jobs and created financial instability and depression among the Japanese population. The Lost Decades of Japan created something called stagflation, which is where you have inflation or rising prices while everything else is stagnant or stays still, like people's incomes. So, to stimulate the economy, the Bank of Japan dropped interest rates to near zero to stimulate borrowing and spending. But that didn't end up saving Japan; instead, this period of stagflation extended into the 2000s, and it forced the Central Bank of Japan to do something even more extreme. In 2016, the Central Bank of Japan dropped the key interest rate to negative 0.1%. Now, hold on a minute, negative interest rates. Does that mean that people then get paid to take out a

loan no, but that'd be cool though. Instead, the negative interest rate was targeted directly at the commercial Banks of Japan. The idea was if it cost a bank money to hold their customer deposits every month, they would want to hold as least amount of money as possible. It was a way of not just encouraging but forcing those Banks to lend out that money as much as possible. It was a way for the papa Bank, the Central Bank of Japan, to tell the baby Banks, the commercial banks, that hey, we have to artificially stimulate borrowing and spending. Quantitative easing is the more technical word for it in economics, and the Bank of Japan wasn't the only one doing it. Before the Bank of Japan adopted negative interest rates in 2016, it was the Danish Central Bank that set negative rates in 2012. Then the European Central Bank did it in 2014 to fight against deflation, and then later that year the Swiss National Bank did it to prevent excessive appreciation of the Swiss frank. And then in 2015, Sweden's

Central Bank did it to boost inflation and economic growth, but here's the thing: it still didn't really work because Japan has one major problem: their aging population. Japan has one of the highest life expectancy rates in the world and one of the lowest birth rates in the world. Japan has one of the fastest declining populations in the world. From the current 124 million, the number is expected to drop below 100 million by 2056. By 2100, the population will likely be half of what it is now. According to the World Economic Forum, as many as one in 10 people in Japan are over the age of 80. Japan's workforce is getting smaller. That puts a strain on its economic growth because the more old people you have that are not working, it means higher health care and pension costs, and that makes it harder for the Bank of Japan to justify increasing interest rates when the population is already having a hard time. That's why rates were negative for 8 years straight. The Bank of Japan just raised interest.

rates in 2024, which was the first rate increase in 17 long years. Well, the Bank of Japan (BOJ) is raising interest rates for the first time in 177 years today, making it the last major central bank to exit the world's negative raid policy. The question is, how does all of this tie into the collapsing Yen and the strength of the US dollar? So typically, the Yen goes up in value when people are worried of a recession happening, but so far we've seen the opposite because the US economy has been really strong, even though we have high interest rates, which has also had the effect of attracting a lot of money into the US economy, which has helped boost the strength of the US dollar and weakened the Yen. Japan right now is criticized for not doing enough to convince people to park their money in the Yen since rates are still close to basically zero, which means there's no incentive to. And according to Sachs, the outlook for the Yen is weak for at least a little while longer. Just remember that.

how strong a money or a currency is depends a lot on the central bank's interest rate. The more expensive it is to borrow money, the more valuable it tends to be, and the cheaper it is to borrow it, the less valuable it tends to be. Right now, the US dollar is pretty expensive to borrow at 52%, whereas the yen is really cheap. But looking back at history, my personal question is: what were the lessons that we learned? What could we have done differently to prevent the Lost Decades of Japan? And it turns out there's actually three lessons that economists have learned that could have maybe prevented or lessened the effects of it. First, the Bank of Japan should have adopted a tighter monetary policy sooner, meaning they should have been afraid to increase interest rates and make it more expensive for corporations to speculate on real estate the way they did. Two, if Japan had stronger regulatory oversight over its financial institutions, it would have really lessened the sketchy lending practices of Shadow Banks. And if they restructured

the NPLs or non-performing loans of the banks that failed, they would have really restored the confidence of investors to start borrowing and investing money again. And three, if Japan's economy wasn't so initially dependent on exports from the beginning, if it was a little more diversified towards the domestic side of things, then the strength or the weakness of the Yen maybe wouldn't have mattered as much to the Japanese economy. So those three things could have probably lessened or even prevented the effects of the Lost Decade. Now, if you made it this far into the video, here's my personal opinion of the weaker Yen and how it all affects us. I visited Japan earlier this year, and without any kind of expectation, it became my favorite place that I've ever been to, especially Tokyo and Kyoto. I just love the food, the culture, and the people. Everything was clean, super respectful. I felt safe, and it was just incredible. I'm super excited to actually go back, probably sometime in October. And to top it off

everything was insanely cheap because of how strong the US dollar is against the Yen. So, if you're planning on traveling overseas, right now is arguably the best time in 38 years to visit Japan. So, if you do plan on going, please be respectful, stay safe, have fun, and as always, I hope you have a wonderful rest of your day. Smash the like button, subscribe if you haven't already, don't forget to grab your free stocks. Links are down below. Go track them automatically with a spreadsheet. Link Down Below in my patreon. Thank you so much for watching this video. I'd love to see you back here next week. I'll see you soon. Bye-bye.

Why The Japanese Yen Is Collapsing (And How This Affects You)

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The Rise and Fall of Japan's Economic Power

The Japanese yen is at a 38-year low against the US dollar, leading to a significant increase in American tourists visiting Japan.

In the 1980s, Japan's economy was booming, with the country making major investments in the US and its land values skyrocketing.

Japan's economy was on track to surpass the US, but ultimately faced one of the biggest economic bubbles in history, leading to a dramatic decline.

Japan's Economic Rise and the Decline of the Yen

Japan's post-World War II economic miracle led to rapid growth and a strong global reputation for high-quality, affordable products.

The strategic weakening of the Yen by the Central Bank of Japan made their goods more affordable for other countries and drove wealth and success for Japanese companies.

However, the Plaza Accord, which aimed to devalue the US dollar, led to deregulation in Japan and a strong Yen, making their products less competitive and causing economic decline.

Japan's Economic Strategy and the Impact of the Plaza Accord

Japan aimed to strengthen its domestic economy and reduce reliance on overseas income by implementing a loose monetary policy and expanding credit.

This led to a massive increase in the money supply and a borrowing spree, ultimately creating a huge economic bubble.

The bubble was characterized by skyrocketing stock prices, with some trading at extraordinarily high price to earnings ratios, leading to a peak in 1989 and a stock market value equivalent to half of the world's entire stock market.

Japan's economy suffered greatly between 1990 and the early 2000s, with the stock market dropping by 80% and land prices in major cities falling by up to 84%.

The period of stagflation led the Bank of Japan to lower interest rates to near zero in an attempt to stimulate borrowing and spending.

In 2016, the central bank took even more extreme measures by dropping the key interest rate to negative 0.

The Impact of Negative Interest Rates on Japan's Economy

Negative interest rates were used to stimulate borrowing and spending by commercial banks in Japan.

However, this strategy was ineffective due to Japan's aging and declining population, leading to 8 years of consecutive negative rates.

The Bank of Japan's recent decision to raise interest rates for the first time in 17 years has significant implications for the Yen and the US dollar, as the Yen is criticized for its weak outlook.

The Impact of Central Bank Policies on Currency Strength

The US dollar is currently expensive to borrow at 52%, while the yen is very cheap, impacting the value of each currency.

The lessons learned from Japan's Lost Decade include the need for a tighter monetary policy, stronger regulatory oversight, and a more diversified economy.

The weaker yen is making travel to Japan incredibly affordable, making it the best time in 38 years to visit.