Bubbles, Bursts and Bailouts: A Comparison of Three Episodes of Financial Crises in Japan

If we look back at the modern economic history of Japan over almost a century and a half since Japan came out of isolation in 1854, we encounter many dramatic transitions, confusions and even catastrophes in the national economy. There have been several periods of serious inflation: inflation during the 1860s just after the ‘opening up’ of Japan; inflation during 1877–81 caused by a large issue of fiat money and contained by the Matsukata deflation policy; hyper-inflation (1945–9) after the Second World War calmed down by the Dodge plan; and the ‘frenzied price’ period (1973–4) that followed the first oil crisis. Related are several episodes of foreign exchange abnormalities: a large outflow of gold accompanied by a tremendous inflow of Mexican dollars during the 1860s; the economic and political drama relating to the return to the gold standard (1929) followed shortly afterwards by the re-embargo of gold (1931); the adherence to the fixed yen-dollar parity that was broken by President Richard Nixon’s New Economic Policy (1971) and finally led to the adoption of the flexible exchange rate (1973); and the recent excessive co-operative effort to maintain the value of the dollar after the Louvre Accord (1987).