6 - The Roads to the Bubble

Summary

In 1950–1970, sustained by the Bretton Woods system and the GATT system, the Japanese economic system was reconfigured to strengthen coordination between the state and the private sector, between banks and manufacturers, between trading partners, and between management and labor unions. The insurance mechanisms devised for supporting coordination, however, induced moral hazard – that is, Japanese corporations overborrowed and Japanese banks overlent. Although strong coordination weakened both shareholder control of management and bank monitoring of corporate borrowers, two mechanisms served to control and monitor Japan's payment problems: periodic tightening of the money supply by the Bank of Japan, and tight government regulation of the finance industry. Under these contingent conditions, excessive competition triggered rapid economic growth, which in turn helped absorb overbuilt production capacity.

Then in the early 1970s, the contingent conditions that had enabled the economy to tolerate excessive competition began to disappear. After the collapse of the Bretton Woods system, the risks of foreign exchange were privatized. The long-term movement of capitalist economies began to shift gears from the expansion of trade and production of 1950–1973 to a new stage in the expansion of finance and monetary activity. The need to hedge against the risks and the desire to pursue higher profits, both resulting from the fluctuation of exchange rates, led to the liberalization of finance.