Hi! So I talk about the Bubble and lost decades here. Also I talk about Plaza here. So use these as the background.

When did Japan's economic bubble and "lost decades" become inevitable? Could it have been prevented?

The current situation in Japan is the build up of policy choices from the post-war. When was it possibly inevitable? The answer involves first defining “it” because this was not one specific event, but a series of events that created accumulated effects over time. The 2008 financial crisis was similar and though I cannot talk about the details, this was a very similar situation in terms of causation. An example that can be mentioned is if the the mortgage regulations were historically sufficient or were interest rates too low after the 201 tech bubble? Was the repeal of Glass Steagall contributive? Generally I think historians would agree anything can possibly alter history, but for these social processes with many variables it is especially hard to define an alternative outcome with high certainty. It is like a soup that even if one ingredient is subtracted is it less of a soup that it was going to be. The case is even harder for historic social processes.

So the problem is that monetary policy is just one area, but what about other areas such as the accounting practices of zaitech? Demographic trends beginning in the 1970s? Fiscal policy? Corporate governance? International trade? Financial liberalization with foreign capital control relaxation since the 1980s? Political and bureaucratic structures since the 1900s and from the Occupation? Labor policy? And more. So the alternative outcomes that never happened is impossible to know.

So in answering this is mainly to sketch a comparison to West Germany. So the idea here to say that West Germany had a different situation and different institutions.

I know some people blame the Plaza Accord which made the yen stronger (and exports more expensive), but Germany wasn't as affected by it, and their economy didn't fall into a decades-long stagnation. Why is that?

So again see the link above. I think that people who blame Plaza likely have an agenda and often not steeped in the diverse economic research regarding the matter. Many mainstream economists both in Japan, the US, and elsewhere show that Plaza was not meant to hurt Japan, but to solve a problem and maintain trade liberalization. So it just so happens that the effect overshot because Japanese goods were in high demand. That’s a good thing that there was still high demand. The yen appreciation also had the effect of stabilizing imports, which Japan heavily relied upon such as energy. Japan’s economy was also not exactly economically stable since the Bretton Woods system collapse and the oil shocks of the 1970s. So yen appreciation was expected by Japan and discussed what Japan should do to structurally adjust to a higher valued yen. Again, Plaza had its narrow goals, but Japan was not bound to committing to specific reforms in response to the yen value change. It is also possible that Nakasone and other politicians were pushing for economic reform. The yen actually devalued after the Louvre Accord (1987) was signed and during the bubble years (1987 - 1990) to 130 - 150, but after the bubble (1991 - 1992) the yen appreciated drastically to just above 90 yen per dollar because of monetary and fiscal policy.

So the question should be if Japan (the Japanese government) did the right things in response to varying changes? Clearly, the decisions were consequential.

Germany was a different case than Japan. First consider that Germany was a smaller balancing target than Japan, but nonetheless the Deutsch mark appreciated rather steeply. German trade with the US was not as large as Japan’s. Then West Germany was part of the European Economic Community (EEC), which had its own trade regulation. The EEC had its own currency mechanisms (the European Monetary Union - EMU). They also weren’t very protectionist solely as single entity like Japan, but had their own common market restrictions under the EEC. So trade was under very different circumstances with Germany and the European common market.

It might also be noted that there was European and American trade friction throughout the Cold War. The Europeans were wary of American free-markets, and Americans criticized European welfare states and very high trade regulation. The Europeans and especially the Germans were very skeptical of Plaza.

Germany didn’t follow the same monetary policy as Japan. Both countries lowered their bank reserve requirements (interest rates), but they had different conditions and reacted differently over time. The Bundesbank (BB - West German central bank) was far more independent than the Bank of Japan (BoJ). Germany never got to the point of developing a bubble. They increased interest rates as the economy heated up a bit. They didn’t have loose accounting practices and the West German government wasn’t pushing banks to lend.

So the overall point is that Japan was a different economy that led to the bubble.

Could the bubble, its collapse, and the stagnation that continues to this day have been prevented if there was more sensible monetary policy by the Bank of Japan or other institutions?

Again, monetary policy is one thing. Obviously it is hard to speculate on if this would be different and on which variables. Economists and other scholars point to the dysfunction between the BoJ and the MoF, but take into account the whole system as dysfunctional. The BoJ and MoF are just one element, but consider that it is politicians that should be disciplining them to do the right thing as representative of the best interests of the people. In a sense, there was no adult in the room just like other financial crises.

What was stopping them from making structural reforms?

Short answer: nothing, but Japan’s government. Yet it has to be taken what is structural reform and the history of what they were doing. So I talked about the Labor Standards Law here. Would this be considered structural reform? Putting aside effectiveness, it is still structural reform. It did create a structurally different economy though not one that has contributed to economic growth. There are other structural reforms like corporate governance, bureaucratic rules, and more labor policy changes. Perhaps these were slow and not executed correctly, but nonetheless reform.