Japan took the world by storm—
then fell under external pressure and the policies adopted in response

On September 22, 1985, at the Plaza Hotel in New York, the finance ministers and central bank governors of the Group of Five—Japan, the United States, Britain, West Germany, and France—agreed to bring down the overvalued dollar and began intervening in the currency markets together. Behind the move were a dollar pushed up by high U.S. interest rates and America’s “twin deficits” in its budget and its trade.

The U.S. trade deficit in 1985 was about $148 billion, roughly a third of it with Japan. Bank of Japan data put the average rate for August, the month before the accord, at ¥237.2 to the dollar.

The monthly average rate reached ¥128.25 in December 1987 and ¥123.16 in November 1988, and around the end of the year the yen briefly traded in the ¥120s. Exporters’ margins deteriorated rapidly, and the period became known as the “strong-yen recession” (endaka fukyō).

The U.S. deficit, however, did not shrink right away. Higher dollar prices took time to show up in export volumes, and Japan’s trade surplus with the United States actually grew in 1986. In October 1987, the United States also suffered Black Monday, when stock prices crashed.

Starting in January 1986, the official discount rate was cut five times, reaching 2.5% on February 23, 1987. It stayed there for two years and three months, until May 31, 1989.

Concern for the world economy after Black Monday helped keep the easing going, and looking back, it is widely seen as having created “excess liquidity,” with companies and financial institutions awash in cash.

Zaitech—companies putting the money they raised into financial investments instead of their core businesses—spread fast, and money flooded into stocks and real estate. Because so much lending was secured by land, every rise in land prices increased the value of the collateral, which let borrowers take on even more debt.

The commercial land price index for the six major cities rose from 128.9 at the end of March 1985 to 315.0 at the end of March 1988, a roughly 2.4-fold increase in three years.

By the Cabinet Office’s official business-cycle dates, the expansion lasted 51 months, from December 1986 to February 1991. The commercial land price index for the six major cities peaked at 519.4 at the end of March 1991, about four times its 1985 level. The value of all land in Japan also peaked, at about ¥2,456 trillion at the end of 1990 (System of National Accounts).

Abroad, Sony bought Columbia Pictures in 1989, and Mitsubishi Estate bought the Rockefeller Group the same year. In May 1990, a Japanese businessman bought Van Gogh’s Portrait of Dr. Gachet at auction for $82.5 million (about ¥12.5 billion).

For new graduates, the job market was an extreme seller’s market. Recruit Works Institute’s ratio of job openings to applicants among university graduates hit 2.86 for the class of 1991, the highest since the survey began with the class of 1987. Companies offered about 840,000 positions for roughly 290,000 graduates seeking jobs in the private sector.

To stop rivals from poaching the students they had offered jobs to, companies routinely whisked them away on trips or “overseas training” at company expense. These “lock-in trips” (kōsoku ryokō) were a standard recruiting tactic of the time. Plenty of people recall being taken to Hawaii, and as early as 1981 the Nihon Keizai Shimbun was already reporting on companies using training trips to keep recruits away from rivals.

Overseas travel boomed as well. The number of Japanese traveling abroad rose 2.2-fold, from about 4.95 million in 1985 to about 11 million in 1990. People who lived through those years recall that weekend trips to Hawaii, Guam, or Saipan became fashionable. Overseas resorts are among the defining images of the bubble.

The Bank of Japan raised rates five times between May 1989 and August 1990, taking the official discount rate from 2.5% to 6.0%. On March 27, 1990, the Ministry of Finance issued a directive on real-estate lending known as the lending cap (sōryō kisei), which required banks to keep their property loans growing no faster than their lending overall. It stayed in force until December 1991.

The so-called BIS rules (the Basel Accord), agreed in 1988, set international capital requirements for banks. Wariness of Japanese banks, which had expanded rapidly abroad on thin capital, is said to have been part of the background. In Japan, however, the rules did not fully apply until the end of March 1993, and they were a separate framework from the lending cap.

Pressure came from the United States, too. In the Structural Impediments Initiative, talks that began in 1989, Washington put forward more than 200 demands. Among them was an overhaul of land taxation: Japan’s tax rules, the Americans argued, made it too easy to hold on to land and were driving prices up. The lending cap was issued while those talks were under way. And because Japanese banks were allowed to count 45% of the unrealized gains on their shareholdings as capital, every fall in stock prices cut directly into how much they could lend under the Basel rules.

The broad outlines of the land value tax were set in the Government Tax Commission’s basic report of October 1990. The law was promulgated in May 1991 and took effect on January 1, 1992. The decision came at almost the same time that big-city land prices peaked, in March 1991. By the time the tax took effect, prices were already falling.

Stocks cracked first. The Nikkei 225 fell about 39% in a single year, from 38,915.87 at the end of 1989 to 23,848.71 at the end of 1990. Land followed later, starting to slide in 1991, and by 2005 commercial land in the six major cities had lost about 87% of its peak value.

As collateral values fell below outstanding loan balances, bad loans piled up on banks’ balance sheets. Major financial failures came several years after the collapse, clustered in 1997–98.

The ratio of job openings to applicants among university graduates fell year after year, from 2.86 for the class of 1991 to 0.99 for the class of 2000, below 1 for the first time. “Employment ice age” (shūshoku hyōgaki) won a special jury prize for coined words in Japan’s 1994 Buzzword of the Year awards, and the share of university graduates who found jobs sank to 55.1% in 2003.

The stagnation dragged on, and the “Lost Decade” was renamed the Lost 20 Years, then the Lost 30 Years. The Nikkei did not climb above its end-1989 close until February 2024.

The lost years did not end after one decade, or even two. The Nikkei took 34 years to climb back above its end-1989 close, finally doing so in February 2024. The policy rate returned to 1% in June 2026, for the first time in 31 years. Along the way, in 2023, Germany overtook Japan in nominal GDP, pushing it down to fourth place in the world.

The damage in the land market lasted even longer. Commercial land prices in the six major cities finally returned at the end of March 2026 to where they had stood in March 1985, yet even that is only about a quarter of the peak. Nationwide commercial land prices remain at only about 24% of their peak.

Since 2024, though, the tide has turned. The Nikkei ended 2025 above 50,000, and in June 2026 it closed above 70,000 for the first time. On September 16 it closed at 63,923. The yen has stayed weak, averaging ¥151.50 to the dollar in 2024 and ¥158.78 from January through August 2026.