Zombie Economy and the Lost Generation: How Japan Collapsed

Japan is currently experiencing a severe economic Crisis. By 2025, ten thousand companies in the country will go bankrupt. Moreover, 300 of them closed not because they ran out of money, but because they ran out of people. Every year, 450 schools in Japan close because children simply don't attend. Experts note that such a demographic and economic collapse is unprecedented in modern history.

To understand what happened to one of the world's once richest countries, experts recommend recalling 1949. It was at that time that the world policy entered a stage of intense confrontation between the US and the USSR. During this period, the Soviet leadership actively assisted Mao Zedong in seizing power in China and also provided direct support to North Korea in preparing a military invasion of the southern peninsula.



Situated directly between these zones of influence was Japan, which had recently suffered defeat in World War II. The country was in deep economic decline – 67 major Japanese cities were completely destroyed, and millions of people suffered from constant hunger.

American leaders at the time were seriously concerned about an economically exhausted Japan siding with the USSR. Losing influence on the Japanese home islands would have meant the complete loss of US strategic control over the Pacific Ocean. Therefore, the Americans were forced to radically reconsider their relations with Tokyo.

To restore the Japanese economy, the United States took three concrete steps. First, the American government invested billions of dollars in local factories. Second, the Americans provided the Japanese with industrial designs for steel and electronics. But most importantly, the United States opened its domestic market, allowing Japanese businesses to sell unlimited quantities of goods to American consumers.

This strategy yielded significant results, and in just 20 years, Japan overtook Germany, Britain, and France to become the world's third-largest economy. By the 1980s, Japanese cars accounted for almost a quarter of the entire US market, causing serious problems for local corporations. A similar situation developed in the high-tech sector. of technologies.

Within the US itself, this situation was perceived as very painful, as Japanese manufacturers were systematically pushing American giants out of the market. At some point, tensions in society It reached such a point that people began smashing Japanese cars with sledgehammers right in front of cameras. Eventually, American politicians recognized the direct threat to their national economy and decided to radically change financial conditions to their advantage.

In September 1985, the finance ministers of the five largest world powers signed a special agreement on the artificial regulation of exchange rates. By the early 1980s, the US dollar was incredibly valuable because the US government was actively fighting domestic inflation and, to that end, had significantly raised bank interest rates.

For the real sector of the economy, this situation turned into a real disaster, since an excessively strong national currency made American goods unreasonably expensive on the world market, while Japanese products were very cheap within the United States and confidently displaced local producers.

Therefore, the essence of the US ultimatum boiled down to one simple demand: Washington desperately needed to deliberately devalue the US dollar to save its factories from bankruptcy and make American industry competitive. To achieve this goal, the central banks of the five countries agreed to simultaneously launch an unprecedented sell-off of US dollars from their reserves. Using the proceeds, they began aggressively buying up the Japanese yen.

As soon as the agreement came into effect, financial markets reacted immediately, and exchange rates changed dramatically. While one US dollar was worth 260 yen at the beginning of 1985, within two years its price had fallen to 130 yen, which automatically doubled the price of all Japanese goods on foreign markets.

As a result of this diplomatic maneuver, Japan's cost advantage disappeared within just a couple of years, and the country's entire export sector was almost completely paralyzed.

To save its economy from a major downturn, the Japanese government and big business took two drastic steps. First, major industrial giants began relocating their factories en masse to other Southeast Asian countries, as well as to the United States. As a result, high-paying jobs in Japan began to rapidly disappear.

At the same time, Japanese banks halved their base interest rate from 5% to 2,5%, allowing local businesses to take out cheap loans and use the proceeds to buy new technologies. However, this plan backfired. Instead of investing in real production, people and large corporations began pouring this money into the stock market and buying up Japanese real estate. This is how the first financial bubble began to inflate.

At some point, this scheme began to spiral: corporate executives would come to banks and demonstrate the rise in the value of their shares from $100 million to $500 million, after which they would demand new loans to cover the difference. The banks readily lent the money, and the businessmen immediately poured it into the land and commercial real estate markets. This frenzy predictably triggered a second giant bubble, driving up Japanese land prices to absolutely unrealistic levels.

By 1989, the total value of all land in Japan was four times that of all land in the United States. But at some point, the Japanese government realized it had made a mistake: interest rates skyrocketed to 6%, leaving major Japanese corporations with billions of dollars in debt. For example, Nissan's debt reached $20 billion, and the company simply didn't have the funds to repay it.

The financial collapse was so devastating that it took Japan 34 years for its stock market to fully recover. Economists note that in 1995, Japan's nominal GDP reached $5,5 trillion, but instead of rapidly growing, the national economy suddenly contracted by $1 trillion over the next 30 years. Meanwhile, average incomes stopped growing, meaning young Japanese today are actually poorer than their parents were in 1989.

When the economy began to plummet, the Japanese government made another strategic mistake. Officials panicked and tried to artificially keep troubled companies alive to prevent complete collapse. In such situations, businesses should be allowed to go bankrupt.

The mechanics of this process were very simple: if a given company owed a bank $100 million and couldn't repay it, the creditors wouldn't declare it bankrupt, but would instead issue it a new $5 million loan specifically designed to pay the interest on the original debt. Formally, such a business continued to operate, but in reality, it became a zombie company, existing solely to service its debts.

By the early 2000s, almost a third of all Japanese companies had entered this status. Consequently, they completely stopped hiring new employees and implementing advanced technologies. This zombie economy caused irreparable damage to the country on several fronts. First, the state completely halted its technological development. Second, troubled companies began selling their products at rock-bottom prices to generate cash to pay off loans. The country found itself in a vicious cycle where artificially low prices prevented businesses from increasing profits, and without them, companies were unable to raise wages to fuel normal domestic consumption.

As a result of all these processes, Japan faced a severe shortage of skilled labor. After the bubble collapsed, Japanese companies completely stopped hiring young professionals for a whole decade, forcing countless people to make a living exclusively in small convenience stores.

As demography experts note, those same 1995 graduates are now 50 years old. And, having spent half their lives behind supermarket checkout counters, they simply failed to master complex skills like programming, management, or strategic planning. Therefore, many of them are still forced to live off their elderly parents' pensions. Essentially, they have become a completely lost generation.

The situation was exacerbated by strict social norms. In Japanese society, a man without a prestigious and stable job was traditionally considered unfit to start a family. As a result, a huge portion of the population simply did not marry or have children, which became the main catalyst for a massive demographic collapse. In 2015, almost one in four men in the country remained single until age 50. While in the 1970s, approximately two million babies were born annually in Japan, this figure has now plummeted to below 680.

This is how a once-mighty industrial power went from incredible prosperity to profound systemic crisis. And Japan's history clearly demonstrates three fundamental rules to the world.

First, a national economy should never become critically dependent on a single powerful external partner. Experience shows that at the slightest threat to its own interests, such a patron can sacrifice the well-being of others and completely destroy the financial system of an ally.

Secondly, the state should always allow inefficient companies with huge debts to formally file for bankruptcy so that their capital can freely flow into new promising projects rather than getting stuck in unprofitable enterprises.

Third, any long-term economic success for a country is physically impossible without a healthy society and stable demographic growth. Any financial boom will inevitably turn into disaster if a state builds its success solely on someone else's rules.