Simply, the bubble was deliberately "popped" by the the Japanese Central Bank (Bank of Japan/BOJ) in order to carry out structural reforms.

Now the background to this is rather nuanced.

After World War 2, Japan's economy still used its wartime system of "Window Guidance". In this system, the BOJ dictated the amount and value of loans that banks must give out, as well as which industrial sectors banks must give out their loans to. Simply, there were loan quotas which banks had to fulfil. This system worked well in shaping up productivity during the war.

This system also worked well in the post-war era, and Japan managed to rebuild itself. It proved to be so efficient, that Japanese firms expanded abroad.

In the 1980s, the BOJ kept increasing loan quotas that banks had to issue. If a bank failed to reach that quota, it would be penalized. Most of the money was got pumped into real estate and the stock market, which created a bubble.

Two BOJ governors, Yasushi Mieno and Toshihiko Fukui (who were educated in America), wanted to being about structural reforms to the Japanese economy that was (at the time) still based on a wartime system. Broadly speaking, structural reforms are liberalisation, privatisation, and deregulation.

So the BOJ deflated the economy, which "popped" the bubble.

This was the core of Richard Werner's book, " Princes of the Yen: Japan’s Central Bankers and the Transformation of the Economy". You can read more about it in his book. Werner spent some time in Japan as a visiting researcher at the BOJ and Ministry of Finance, and was also assistant professor in economics and finance at Sophia University in Tokyo.