Introduction

The period from 1980 to 1985 represents the high-water mark of the Japanese economy in terms of financial and central bank policy outcomes. In terms of most economic and financial indicators, Japan's performance outpaced many other industrial countries, especially Japan's ability to achieve stable noninflationary growth in the face of a second set of oil price shocks in 1979 while at the same time adopting a policy of domestic and international financial liberalization. Japan appeared to have successfully adapted to the new economic, political, and technological environment and achieved an impressive record of economic and financial performance. It drew world attention both in terms of Japan's absolute performance and Japan's relative performance to much of the industrialized world.

Japan's state-directed approach to managing the economy combined with a powerful bureaucracy seemed to function in the more liberal and open financial environment as well as it did during the first part of the postwar period. The second half of the 1980s appeared to be a continuation of these trends. But in fact, a slow accumulation of stresses occurred as equity and land prices began to increase in 1985 and 1986 and then began to increase at very rapid rates, which by 1988 reflected a full-blown asset bubble. The asset inflation bubble combined with strong real GDP growth and price stability rationalized the phrase “bubble economy.