What are the Two Major Causes of Japan's Lost Decades? - YouTube

As more people buy bitcoin,

it falls even more

and it looks like real estate prices plummeting as Japan's interest rate surged

On September 22, 1985, the G5 finance ministers and central bank governors of the United States, Japan,

West Germany, the United Kingdom, and France gathered at the Plaza Hotel in New York,

signed an agreement to appreciate the currency of Japan and West Germany.

The people who were there at the time could not have even imagined

that the Japanese economy would plunge into the abyss of 30 years lost by this historic event,

which was agreed upon at the Plaza Hotel and called the 'Plaza Accord'.

There is a book that analyzes the causes,

process, and lessons of the Plaza Accord

in a very interesting way from two perspectives: 'exchange rate' and 'interest rate'.

This is 'The Future of Economic Wars for the Next 3 Years Through Exchange Rates and Interest Rates' by writer Kun Young Oh.

He refers to 'interest rates' as 'the value of money'.

The price is determined by supply and demand in the market.

What kind of fruit do you guys like?

Tangerines are in season in winter,

if the demand for tangerines increases or the production of tangerines decreases, the price of tangerines will rise.

Conversely, when people eat apples instead of tangerines, which reduces the demand for tangerines

or increases the production of tangerines, the price of tangerines goes down.

Interest rates, the 'value of money', are likewise driven by supply and demand.

If there is a lot of demand for money in the market,

the interest rate, which is the 'value of money', will rise because both of you are trying to borrow money.

Conversely, if there is a lot of money in the market,

there are many people who will lend you money.

As a borrower, you will borrow money from the person who lends you the lowest price.

Interest rates, the 'value of money', go down.

'Exchange rate' is also 'value of money'

But 'interest rate' is also the value of money, so are the two the same?

The writer explains that 'interest rate' is 'the value of money domestically'

and 'exchange rate' is 'the value of money globally'.

and 'exchange rate' is 'the value of money globally'.

For example, Korea exports a lot to the US.

Then, goods will go from Korea to the US,

and US dollars will come from the US to Korea, so there will be more dollars in Korea.

As the supply of dollars increases in Korea, the value of the won rises relatively.

The won's 'exchange rate' appreciates.

So what if the US raises interest rates?

If you hold US dollars, you can earn more interest,

which will increase the demand for dollars.

Then more and more people want to sell won and buy dollars

In other words, we will convert the won into dollars.

As the demand for the dollar increases, the value of the dollar rises and the value of the won falls.

The won depreciates

You get the idea of 'interest rates' and 'exchange rates'?

So let's look at how these two factors actually caused the long-term recession of the Japanese economy.

First, we fly back to the 1970s, before the Plaza Accord of 1985.

At that time, inflation was so high that it could be called the 'Inflationary Era'.

To counter this inflation, the U.S. Federal Reserve is supercharged by raising interest rates by as much as 20%.

The current US benchmark interest rate is less than 1%, so can you see how high it is 20%?

When inflation occurs, prices rise and the value of money decreases.

In the past, you could buy a banana for $1,

but the price has risen and one banana has become $2.

So, the number of bananas you can buy for $1 will be 0.5.

The number of bananas you can buy with the same money has decreased. As prices rise, the value of money declines.

On the other hand, if the value of money rises, prices will fall.

Interest rates are the 'value of money', so when interest rates rise, the price of money rises.

As the price of money goes up, prices go down.

When interest rates rise by 20%,

fewer and fewer people borrow money at such high interest rates to buy goods,

and demand for goods decreases, so prices fall.

In the end, the US Federal Reserve was able to lower inflation by raising interest rates.

At that time, Fed Chairman 'Paul Volcker', who implemented

such a tough inflation suppression policy, earned the nickname 'Inflation Fighter'

This person has had a huge impact on the US and global economy

to the extent that he served as an economic adviser to the Barack Obama administration.

But high interest rates will be fatal for businesses.

The interest burden on the previously borrowed money will increase,

and you will have to pay 20% interest,

but you will not be able to borrow additional money to invest.

At that time, more than 40% of U.S. companies went bankrupt and the unemployment rate was very high.

So, now that inflation has been controlled to some extent,

it is time to stimulate the economy.

To do that, the Federal Reserve cut interest rates and the government pumped huge amounts of money into the market,

helping the economy recover to some extent.

But the government's spending was so great

that America's finances are were a serious deficit.

To make matters worse, the US trade deficit is getting worse.

The quality of products such as automobiles made in Japan and West Germany is getting better,

but the price is also low, so Japanese and West German products are imported into the US market,

and the US is in a huge trade deficit.

The 'fiscal deficit' and the 'trade deficit' are called 'Twin deficits' and have plagued the US economy.

To solve this problem, the United States finally draws its trump card.

That's the Plaza Accord.

On September 22, 1985, the United States invited the finance ministers and central bank governors of Japan

and West Germany to the Plaza Hotel in New York, USA,

and reached a 'Plaza Accord' to lower the exchange rate of Japan and West Geremany to appreciate the currency.

Because of this, before the Plaza Accord in 1985,

the exchange rate of the yen to the dollar was 250 yen to the dollar, but in 1988,

it fell by almost 50% to 120 yen to the dollar.

In the past, one dollar could buy 250 yen worth of goods,

but now one dollar can buy only 120 yen worth of goods.

The dollar has fallen and the yen has risen. The yen appreciated.

What happened when the yen doubled?

In the past, you could buy a Japanese Toyota car for $20,000

However, since the value of the yen has doubled, now

you have to pay 40,000 dollars to buy the same Toyota car.

Then, Japanese cars will sell less because their price competitiveness in the U.S. market is weakened,

and the extent of the U.S. trade deficit with Japan will be reduced accordingly.

As a side note, the appreciation of the yen at that time was a great opportunity for Korean companies.

Increasing demand for cheap Korean products instead of expensive Japanese products

has helped many Korean companies export to the US.

Hyundai Motor Company also did not miss this

great opportunity and advertised,

"You can buy two Hyundai cars at the price of buying another company's car."

Thanks to the appreciation of the Japanese yen, it was possible to buy one get one free even for expensive things like cars.

The yen's appreciation reduces the US trade deficit due to imports of Japanese goods

But what can be done to further reduce the trade deficit?

Conversely, can we export more American products to Japan?

To do that, the United States once again invites Japan and West Germany to Paris, France.

That's the 'Louvre Accord' in February 1987.

The agreement was signed at the 'Louvre Palace' in Paris, France, so it is called the 'Louvre Accord'.

In the Louvre Accord, the U.S. asked Japan to buy more U.S. goods

The price of American goods has doubled compared to Japanese goods

as the yen has doubled through the Plaza Accord.

U.S. products have become more competitive in price in Japan's domestic market

However, no matter how cheap the goods, if the domestic economy in Japan is not good, consumers will not open their wallets willingly.

So Japan lowers interest rates to stimulate domestic economy

As interest rates fall, people will borrow more money

and use that money to buy more things because the interest burden decreases.

If the economy is recovering, we will buy more American products at very cheap prices.

In addition, the Japanese government is drastically easing restrictions on real estate.

At that time, it is said that the LTV of the mortgage loan ratio reached 120%.

This means that you can get a loan of $1.2M using a $1M worth of house as collateral.

I'm borrowing more than the house price, but in this case, you say "The tail is wagging the dog"?

The interest rate is low and the loan is high, so both you and I will buy real estate.

As demand for real estate rises, real estate prices continue to rise.

From the perspective of a company, it is much easier to make money by investing in real estate than to spend money on difficult R&D.

So companies start buying huge amounts of land and buildings.

As the economy overheated

and real estate began to bubble,

the price of real estate in Japan soared to the point

where people say that if you sell Tokyo,

you will buy the entire United States.

There was a prevailing atmosphere that Japan would soon overtake the United States,

to the extent that Japanese people walked in Hawaii wearing Japanese clothes.

Because money is overflowing in the market

It seems that the Japanese people with a frugal image also loosened their belts and played happily ever after.

If you look at the pictures of nightclubs in Japan at that time,

you can see how booming Japan was.

Before the bubble burst, I think Japanese people would have loved it

But the bubble can't grow forever

As the cherry blossoms in full bloom suddenly fall,

as the bubble begins to burst from the late 1980s,

Japan is plunged into a long-term recession of the lost 30 years.

So, why did the Japanese government neglect this real estate bubble?

In fact, the Japanese government was also aware of the dangers of the real estate bubble.

So when the economy overheats, the central bank of Japan fiddles with the card to raise rates.

If interest rates are raised, the interest burden will increase,

so you will get less loans, and people will spend less, which will alleviate the overheating of the economy.

However, if the demand in Japan's domestic market decreases that much,

the export volume of other countries, including the United States,

will also decrease, and companies and economies around the world may suffer.

On Monday, October 19, 1987, on Monday, October 19, 1987,

the Dow Jones Industrial Average plunged 22% in a single day amid fears of a contraction in demand as Japan and West Germany's plans to raise interest rates spread around the world.

Not 2.2%, but a whopping 22%.

It is called 'Black Monday' because this terrible event happened on a Monday.

As the global economic crisis hits, Japan is unable to raise interest rates as planned.

It failed to implement austerity policies such as interest rate hikes to catch the real estate bubble.

Moreover, Japanese domestic prices were quite stable at that time.

International oil prices have already fallen a lot, and the Japanese yen is strong, so the prices of imported goods will be low.

Even though real estate and stock prices are rising day by day, domestic prices are stable,

so there was no need to raise interest rates to push down the rising inflation.

Japan did not raise interest rates at that time

due to the possibility of a global economic crisis following the rate hike and relative price stability.

Eventually, the real estate bubble is tolerated.

However, the stable price level began to go up eventually

and the Central Bank of Japan started raising interest rates in 1989 to catch this.

The problem is that the interest rate was raised too quickly in a short period of time.

Over the next year, the interest rate increased by a whopping 3.5% to reach 6%.

Many people bought a house with a loan,

but they start selling their house because they are worried about the interest burden

because the interest rate suddenly rises sharply.

"Honey! our neighbor just sold out their house,

we need to sell ours before it falls any further."

I sold the house to pay off the loan I borrowed from buying a house before

but the house price fell so low that I couldn't pay off the loan with the money I sold the house.

Some people are unable to settle such excessive debt and even declare bankruptcy 'default',

crying "I can't pay the debt!"

This also puts the lending bank at risk.

People have more and more debts,

people begin to reduce consumption under the burden of this.

As consumption declines, the price of goods falls and the profits of the firm

Businesses reduce investment, lower wages and reduce employment

As wages fall and jobs are provided, consumption is further reduced.

So the price of goods falls further.. This vicious cycle is called 'deflation'.

As the bubble bursts in the Japanese economy,

the Japanese economy falls into a vicious cycle of deflation,

and the lost 30 years of the Japanese economy begin.

Suddenly bitcoin crossed my mind.

Bitcoin's price plummeted in response when the US Fed recently signaled

that it would raise interest rates sooner than planned.

Interest rates are...

'the value of money'

In other words, the 'value of money' rises when interest rates rise

People will try to hold money by selling stocks or other assets like bitcoin.

As more people sell bitcoin, the bitcoin price falls further.

Doesn't it look similar to the real estate price plummeting due to the rate hike in Japan?

Of course, Bitcoin and real estate are different, and since then

and now are different times and environments, this is not to say that Bitcoin will continue to fall in the future.

'Interest rate' and 'exchange rate' are not only the global macroeconomic

but also on individual assets such as 'real estate' and 'bitcoin',

I took the example of Bitcoin.

Let's go back to Japan.

In April 1995, the countries gathered again at the G7 summit.

To escape the never-ending recession, this time the United States is not asking Japan, but Japan is asking the United States.

Japan asks the US to forgive the 'devaluation of the yen'

because the Japanese economy is currently too bad

Was it because the U.S. felt sorry for the Japanese economy being hit by the Plaza Accord?

The United States agrees to Japan's request

The US agreed with the depreciation of the yen, which devalues the yen.

In the previous 'Plaza Accord', the yen appreciated,

but in this agreement, it 'depreciated'.

So this agreement is called the 'Anti-Plaza Accord'.

If the yen depreciates, the export price of Japanese products will be cheaper.

As the export of Japanese products increased, it was good for Japan,

but there are countries that have been hit by a headwind.

It's a neighboring country, Korea.

Korea and Japan compete on exports

Until then, since the value of the yen is high, the export price of Korean products is much cheaper

So the export volume of Korean companies surged

they invested more and more to meet the demand

they even got the dollars loans from the US

but suddenly the Japanese yen depreciated through 'Anti-Plaza Accord' in 1995,

export prices of Japanese products fell.

As a result, Korean companies took a hit and their financial situation became difficult,

making it difficult to repay the dollar loan.

The foreign currency crisis has come.

The IMF crisis just happened to Korea.

Of course, there were various other causes,

but it is showing how much influence 'exchange rate' have on the national economy

through the connection between Anti-Plaza Accord and Korea's IMF crisis.

Afterwards, the book touches not only in Japan's efforts to escape the economic recession such as 'Abenomics',

but also It describes in detail how the 'exchange rate' and 'interest rate' affected the Korean economy,

and how it caused and resolved the European debt crisis and China's debt crisis.

Actually, this book was written by the writer in August 2019,

and it contains a lot of content that is still helpful

He wrote 'Moving Wealth' in 2020

and 'Scenario of Wealth' in 2021

explaining macroeconomics in an easy-to-understand manner

as well as containing investment advice

to win in the turbulent financial market.

While reading this book, I learned how 'interest rate' and 'exchange rate'

are only two factors that are so important that a country's economy can rise or fall.

In summary, to improve the US trade deficit,

the 'exchange rate' of the Japanese yen

was appreciated through the 'Plaza Accord'

The 'interest rate' of the Japanese yen was cut through the 'Louvre Accord'.

This caused a serious bubble in the Japanese real estate market,

and to tackle this, Japan raises the 'interest rate'

However, due to a sharp rise in interest rates, real estate prices plummet

and the nation's debt surges, causing the Japanese economy to plunge into a swamp of deflation.

In order to revive the economy,

Japan devalued the yen through a 'Anti-Plaza Accord' with the United States,

and this spark spreads to Korea, causing Korea's IMF Financial crisis.

If we look only at the result of Japan's economic recession

triggered by the Plaza Accord,

it is easy to blame Japan and the Japanese for the recession,

as in "Japanese people spent too much on debts or Japanese companies were poorly managed"

However, "no matter how hard the people or businesses work,

no matter how hard the government tries to solve problems,

if they don't read the macroeconomic trends well,

they can be in crisis."

If you don't properly detect external changes,

you can get into big trouble."

I learned this lesson through this book.

Continuous learning is required to detect external changes

and proactively respond to them.

In the future, my channel will come to you

with more useful videoes

where you can get 'unique insight'

that help you understand you and the world around you!