The reaction of the state to this was to provide cheap funds to keep industrial investment and expansion going. As Karel van Wolferen has said, "To compensate the corporate sector for the squeeze of the exchange rate, the Ministry [of Finance] encouraged the banks vastly to increase their lending".84 But there had been a weakening of the old mechanisms which directed bank lending into industrial development-caused in part by the growing integration of Japanese capitalism into the world system. 85 The expanded bank lending found its way into speculation on a massive scale:
The explosion of liquidity helped set off an upward spiral of real-estate values, long used as collateral by the big companies, which then justified inflated stock values.86
In what was later called the "bubble economy", property values soared and the stock exchange doubled in value-until the net worth of Japanese companies was said to be greater than that of the US companies, although by any real measure the US economy was about twice the size of the Japanese one. But while the bubble lasted the Japanese economy continued to grow-and even after the bubble had started deflating, bank lending enabled the economy to keep expanding throughout 1991-2 as recession hit the US and Western Europe. Then it became clear that the banks themselves were in trouble. They had made loans for land and share purchases that could not be repaid now these things had collapsed in price. The banking system was hit by recurrent crises right through the 1 990s, writing off a total of around 71 trillion yen (over \$500 billion) in bad loans. The total sum owed by businesses in trouble or actually bankrupt were set at 80 to 100 trillion yen (\$600 to \$750 billion) by the US government, and at 1 1 1 trillion yen (nearly \$840 billion) by the IMF. •7
The role of the financial system in producing the bubble and then the long drawn out banking crisis has led most commentators to locate the origin of the Japanese crisis in faults within that system.
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Capitalism in the 20th Century