The Japanese asset price bubble ( baburu keiki, "bubble condition") was an

economic bubble in Japan from 1986 to 1991 in which real estate and stock market prices
were greatly inflated.[1] In early 1992, this price bubble collapsed. The bubble was
characterized by rapid acceleration of asset prices and overheated economic activity, as well
as an uncontrolled money supply and credit expansion.[2] More specifically, over-confidence
and speculation regarding asset and stock prices had been closely associated with excessive
monetary easing policy at the time.[3]

By August 1990, the Nikkei stock index had plummeted to half its peak by the time of the fifth
monetary tightening by the Bank of Japan (BOJ).[2] By late 1991, asset prices began to fall.
Even though asset prices had visibly collapsed by early 1992,[2] the economy's decline
continued for more than a decade. This decline resulted in a huge accumulation of non-
performing assets loans (NPL), causing difficulties for many financial institutions. The
bursting of the Japanese asset price bubble contributed to what many call the Lost
Decade.[4]

Background

Early research has found that the rapid increase in Japanese asset prices was largely due to
the delayed action by the BOJ to address the issue. At the end of August 1987, the BOJ
signaled the possibility of tightening the monetary policy, but decided to delay the decision in
view of economic uncertainty related to Black Monday (October 19, 1987) in the US.[5]

More recent research supports an alternate view, that BOJ reluctance to tighten the monetary
policy was in spite of the fact that the economy went into expansion in the second half of
1987. The Japanese economy had just recovered from the endaka recession (
Nihon no endakafuky, lit. recession caused by appreciation of Japanese Yen), which
occurred from 19851986.[5] The endaka recession has been closely linked to the Plaza
Accord of September 1985, which led to the strong appreciation of the Japanese yen.[6]

The strong appreciation of the yen, however, eroded the Japanese economy since the
economy was led by exports and capital investment for export purpose. In fact, in order to
overcome the endaka recession and stimulate the local economy, an aggressive fiscal
policy was adopted, mainly through expansion of public investment.[2] Simultaneously, the
BOJ declared that curbing the yens appreciation was a national priority.[6][7] To prevent the
yen from appreciating further, monetary policy makers pursued aggressive monetary easing
and slashed the official discount rate to as low as 2.5% by February 1987.[2]

The move clearly to curb further appreciation of the yen, appreciating from 200.05 /U$ (first
round monetary easing) to 128.25 /U$ (end of 1987). The course only reversed by the
spring of 1988, when the US dollar began to strengthen against the yen. Some researchers
have pointed out that "with exception of the first discount rate cut, the subsequent four are
heavily influenced by the US: [the] second and the third cut was a joint announcement to cut
the discount rate while the fourth and fifth was due to [a] joint statement [of] either Japan-US
or the G-7".[2][7] It has been suggested that the US exerted influence to increase the strength
of the yen, which would help with the ongoing attempts to reduce the US-Japan current
account deficit.[2] Almost all discount rate cuts announced by the BOJ explicitly expressed
the need to stabilize the foreign exchange rate, rather than to stabilize the domestic
economy.[7]

Later, BOJ hinted at the possibility of tightening the policy due to inflationary pressures within
the domestic economy. Despite leaving the official discount rate unchanged during the
summer of 1987, the BOJ had expressed concern over excessive monetary easing,
particularly after the money supply and asset prices rose sharply.[7] Nonetheless, Black
Monday in the US triggered a delay for the BOJ to switch to a monetary tightening policy. The
BOJ officially increased the discount rate on March 31, 1989.[3]

The table below demonstrates the monthly average of the U.S. dollar/Yen spot rate (Yen per
USD) at 17:00 JST.[8]
 Month
Year
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

236.91
1985 254.11 260.34 258.43 251.67 251.57 248.95 241.70 237.20 [1]
214.84 203.85

200.05 178.83 175.56 162.72

1986 [2]
184.62 [3] [4]
166.89 167.82 158.65 154.11 154.78 156.04 [5]

153.49 147.57 143.48

1987 154.48 [6]
151.56 142.96 140.47 144.52 150.20 [7]
143.03 [8]
135.25

1988 127.44 129.26 127.23 124.88 124.74 127.20 133.10 133.63 134.45 128.85 123.16

132.01 138.40 141.99

1989 127.24 127.77 130.35 [9] [10]
143.92 140.63 141.20 145.06 [11]
143.55

153.19 147.46
1990 145.09 145.54 [13]
158.50 153.52 153.78 149.23 [14],[15]
138.96 129.73 129.01

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov
Year
Month
 # Remarks

[1] Plaza Accord in September 22, 1985

First round monetary easing (January 30, 1986): Official discount rate cut from 5.0% to
[2]
4.5%

Second round monetary easing (March 10, 1986): Official discount rate cut from 4.5%
[3]
to 4.0% simultaneously with FRB and Bundesbank

Third round monetary easing (April 21, 1986): Official discount rate cut from 4.0% to
[4]
3.5% simultaneously with FRB

Fourth round monetary easing (November 1, 1986): Official discount rate cut from 3.5%
[5]
to 3.0%

Fifth round monetary easing (February 23, 1987): Official discount rate cut from 3.0%
[6]
to 2.5% in accordance to Louvre Accord (February 22, 1987)

[7] BOJ signalling possible monetary tightening

[8] Black Monday (NYSE crash) in October 19, 1987

[9] Consumption tax introduced

First round monetary tightening (May 30, 1989): Official discount rate hike from 2.5% to
[10]
3.25%

Second round monetary tightening (October 11, 1989): Official discount rate hike from
[11]
3.25% to 3.75%

Third round monetary tightening (December 25, 1989): Official discount rate hike from
[12]
3.75% to 4.25%

Fourth round monetary tightening (March 20, 1990): Official discount rate hike from
[13]
4.25% to 5.25%

Fifth round monetary tightening (August 30, 1990): Official discount rate from 5.25% to
[14]
6.00% due to Gulf Crisis

[15] Stock price tumbled to half the level of the peak

Timeline

Plaza Accord ratified in September.[2]

 Japanese yen strengthened from 236.91/U$ (September) to 202.75/U$
(December).[8]

"endaka recession" worsened in fourth quarter.[2]

1985
Nikkei 225 moved above 13,000 by December 2, 1985.[9]

Sharp spike in land prices within Tokyo metropolis; average land prices (per 1sq.
metre) in commercial districts in Tokyo jumped close to 42% compared to the
previous years.[10]

In addressing the appreciation of Japanese yen, the BOJ began to ease the
monetary policy, cutting the official discount rate from 5.0% to 3.0%.[2]

Japanese yen touched a new high against the U$ (154.11/U$) in August before
settling down at 162.13/U$ in December.[8]

Nikkei 225 strengthened further from 13,024 (January 6, 1986) to 18,821 (December
1, 1986).[9]
1986
Average land prices (per 1sq. metre) in Tokyo residential areas recorded an
increase of 45% (compared to 1985), while average land prices (per 1sq. metre) in
Tokyo commercial districts jumped approximately 122% (compared to 1985). Land
prices in Tokyo industrial sites jumped about 14%. (per 1sq. metre)[10]

Commercial land prices (per 1sq. metre) in Osaka rose 35% compared to the
previous year.[10]

Japan's economy recovered, entered into a year of expansion by first quarter.

In accordance to the Louvre Accord, BOJ cut the official discount rate from 3.0% to
2.5%.[5]

BOJ expressed concern over the asset inflation and signaled the possibility of
monetary tightening policy in summer 1987.[5]

Japanese yen continued to be strengthened against U$, touched a new high

128.25/U$ by December.[8]
1987
Nikkei 225 broke the 20,000 level mark by January 5, 1987, and recorded a new high
of 26,029 in August 2, 1987. Nikkei 225 slipped back to 21,564 by December 1, 1987
due to economic uncertainties after the Black Monday of NYSE. As land supply within
Tokyo metropolis was scarce, investors began to speculate land around the Greater
 Tokyo Area, notably Southern Kanto urban land concentrating in Kanagawa (in
Yokohama), Saitama and Chiba prefecture. Urban land in Osaka, Kyoto, Aichi (in
Nagoya) and Hyogo (in Kobe) prefecture experienced unusual growth in asset
inflation.[10]

Japanese yen strengthened to 123.16/U$ by November before weakening slightly

to 123.63/U$ in December.[8]

Nikkei 225 broken the 30,000 level mark and recorded a new high of 30,159 in
December 1, 1988.[9]

Asset prices growth in Tokyo metropolis began to stagnate, especially in residential

1988
areas and commercial districts. Lands in certain wards in Tokyo metropolis began to
drop.[10]

Other urban land in the Greater Tokyo area remained in an upward trend. Urban land
in Osaka, Kyoto, Aichi (in Nagoya) and Hyogo (in Kobe) prefectures was largely
unaffected by the situation of the Tokyo counterparts.[10]

Consumption tax was introduced in Japan in April 1989.[5]

BOJ tightened monetary policy by hiking the official discount rate from 2.5% to
4.25% by late December 1989.[5]

Japanese Yen fell against U$, falling as low as 145.06/U$ by September.[8]

Nikkei 225 continued to be bullish, as it touched a historical all-time high of

38,957.44 in December 29, 1989.[9]

Land prices crashed in Tokyo metropolis as residential land on average 1 sq. metre
1989
declined by 4.2%, while land prices in commercial districts and industrial site in Tokyo
metropolis remained stagnant.[10]

Adjacent prefectures, especially Kanagawa prefecture, also began to be affected

due to its geographical proximity to Tokyo metropolis. In Yokohama (Kanagawa), land
prices in residential areas were either stagnant or dropped slightly compared to
1988.[10]

All other major urban land in Japan remained unaffected by the asset collapse over
Tokyo.[10]

BOJ continued to tighten monetary policy by pushing the official discount rate from
4.25% to 6.00%.[5]
 Japanese yen weakened to as low as 158.50/U$ by April but began to strengthen
in the second half of 1990; it touched as high 129.01/U$ by November.[8]
1990
Nikkei 225 dropped sharply from 37,189 (January 1, 1990) to 23,849 (December 3,
1990), losing over 35% in value in 1990.[9]

Asset prices in the Tokyo metropolis stabilized from moving downwards. All other
major urban land in Japan remained in upward trend.[10]

Japanese yen resumed the upward trend against U$, strengthening back to
129.07/U$ by December.[8]

Nikkei 225 dropped to 22,984 in December 2, 1991 compared to 23,293 in January

1991 4, 1991.[9]

Land prices (residential, commercial and industrial sites) in Tokyo fell sharply. All
other major urban land prices in Japan grew modestly or were stagnant. Towards the
end of the year, most urban land prices fell into negative territory.[10]

Identification

Asset prices

The 1985-1991 asset price bubble affected the entire nation, though the differences in the
impact depended on three main factors: the size of the city,[11] the geographical distance
from Tokyo metropolis and Osaka,[11][12] and the historical importance of the city in the
central governments policy.[6][11] Cities within prefectures closer to the Tokyo metropolis
experienced far greater pressure in the asset prices compared to cities located in prefectures
further from the Tokyo metropolis.

For definition purposes, Japan Real Estate Institute has classified Tokyo metropolis
(including 23 special wards), Yokohama (Kanagawa), Nagoya (Aichi), Kyoto (Kyoto), Osaka
(Osaka), and Kobe (Hyogo)[13] as the six major cities most impacted by the price bubble.
These six major cities experienced far greater asset price inflation compared to other urban
land nationwide. By 1991, commercial land prices rose 302.9% compared to 1985, while
residential land and industrial land price jumped 180.5% and 162.0%, respectively, compared
to 1985.[13] Nationwide, statistics showed that commercial land, residential land, and
industrial land prices were up by 80.9%, 51.1%, and 51.7%, respectively.[13]

By the early 1980s, Tokyo was an important commercial city due to a high concentration of
international financial corporations and interests. The demand for office space continued to
soar as more economic activities flooded Tokyo commercial districts, resulting in demand
outstripping the supply.[11] The government policies to solely concentrate its economic
activities in Tokyo, and the lack of diversification of economic activities in other local cities,
are also partly to blame for the bubble.[11]

By 1985, lands within Tokyo commercial districts were unable to fulfill the market demand.
As a result, land prices in Tokyo commercial districts increased sharply within a year. The
average price per 1 sq. metre for land in Tokyo commercial districts in 1984 was 1,333,000
(U$5,600 assuming in 1984 that 1 U$=238).[10] In just a year, the average price per 1 sq.
metre for land in Tokyo commercial districts increased to 1,894,000 (U$7,958 assuming in
1985 average 1 U$=238).[10] This roughly translates to an increase of 42%/sq. metre over
just a year. By 1986, the average price per 1 sq. metre for land in Tokyo commercial districts
had risen as high as 4,211,000 (U$25,065 assuming 1986 average 1 U$=168), a jump of
122% compared to 1985. Residential land jumped from an average 297,000/U$1,247 per 1
sq. metre (in 1985) to 431,000/U$2,565 per 1 sq. metre (in 1986), an increase of 45%.[10]

Osaka also experienced a rapid growth in land prices, especially in commercial districts. Land
prices in Osaka gained 35% to a price of 1,159,000/1 sq. metre (1986) from an average
855,000/1 sq. metre (1985).[10] Since Osaka uniquely had historical importance as a
commercial center in Japan;[14] hence, land prices in Osaka tend to be higher than most other
urban land in Japan.

By 1987, virtually all land within the Tokyo metropolis was unable to cope with demand. At
this point, residential land in Tokyo increased to 890,000/1 sq. metre (U$6,180 based on the
assumption 1U$ = 144) and commercial land 6,493,000/1 sq. metre (U$45,090).[10]
Consequently, investors flocked to prefectures surrounding the Tokyo metropolis, especially
prefectures within the Greater Tokyo Area. Prefectures located in Southern Kanto were more
favourable to investors compared to Northern Kanto. Hence, land in cities like Yokohama
(Kanagawa prefecture), Saitama (Saitama prefecture), and Chiba (Chiba prefecture) tended
to be more expensive than cities like Mito (Ibaraki prefecture), Utsunomiya (Tochigi
prefecture) and Maebashi (Gunma prefecture). For instance, in 1987, commercial land prices
in Yokohama (average 1 sq. metre) were 1,279,000, Saitama were 658,000 and Chiba were
1,230,000. On the other hand, commercial land prices in Mito (average 1 sq. metre) were
153,000, Utsunomiya were 179,000 and Maebashi were 135,000 in 1986.[10]

Osaka continued to enjoy an increase in land prices especially in the commercial area, as the
prices increased to 2,025,000/1 sq. metre in 1987.[10] Kyoto (Kyoto prefecture) and Kobe
(Hyogo prefecture) also enjoyed a sharp increase in land prices, especially in commercial
areas which gained 31% and 23%, respectively.[11] The effect of the bubble in Osaka spread
as far as Nagoya (Aichi prefecture) which saw the commercial land prices gain as much as
28% compared to 1986.[11]

The first sign of a possible bubble collapse appeared in 1988. By this time, non-prime land
prices in Tokyo had reached their peak, though some areas in the Tokyo wards started to fall,
albeit by a relatively small percentage.[3] Prime land in Ginza district and areas in Central
Tokyo continued to rise.[3] Urban land in other cities at this point remained unaffected by the
situation faced by the Tokyo metropolis. In Osaka, for instance, the commercial and
residential land prices increased by 37% and 41% respectively.[11]

By 1989, land prices in commercial districts in Tokyo began to stagnate, while land prices in
residential areas in Tokyo actually dipped 4.2% compared to 1988.[10] Land prices in prime
areas in Tokyo also peaked around this time; Ginza district was the most expensive, peaking
at 30,000,000/1 sq. metre [15] (U$218,978 based on assumption 1U$ = 137). Yokohama
(Kanagawa prefecture) experienced a slowdown due to its location closer to Tokyo. Saitama
(Saitama) and Chiba (Chiba) still chalked up healthy gain in land prices. All other urban cities
in Japan had yet to see the impact of slowdown in Tokyo.[10]

Between 1990 and mid-1991, most urban land had already reached the peak. The lag effect
from the fall of Nikkei 225 pushed down the prices of urban land in most part of Japan by the
end of 1991.[2] The bubble collapse were officially declared in early 1992 as land prices
dropped the most in this period.[2] Tokyo experienced the worst from the catastrophic in
Japanese economic history. Land prices in residential area on average 1 sq/metre slid 19%
while commercial land prices declined 13% compared to 1991.[10] Overall land prices in
residential area and commercial districts in Tokyo fell to the lowest level since 1987.[10]

Stock Prices

In the 1980s, the direction of stock prices in Japan was largely determined by the asset
market, particularly land prices, in Japan.[11] Looking at the monthly performance of Nikkei
225 in 1984, the index largely moved within 9900-11,600 range.[9] As land prices in Tokyo
began to rise in 1985, the stock market also moved higher. Indeed, the Nikkei 225 managed
to rise past 13,000 by December 2, 1985.[9]

The major surge was obvious by 1986, as the Nikkei 225 gained close to 45% within a year.[9]
The trend continued throughout 1987, when it touched as high as 26,029 by early August [9]
before being dragged down by the NYSE Black Monday. The strong rally throughout 1988 and
1989 helped the Nikkei 225 touch another new record high at 38,957.44 on December 29,
1989 before closing at 38,915.87.[9] This translated to a gain of more than 224% since
January 2, 1985.[9] Some researchers concluded the unusual stock prices are likely due to the
rise in land prices since the corporations net assets increases, hence pushing the stock
prices upward.[2][3] As long as the asset prices continued to strengthen, investors would more
likely be attracted to speculate on stock prices. However, this also portrays the weaknesses
of corporate governance in Japan.[6]

On the downside, the tightening of monetary policy in 1989 seemed to affect stock prices. As
lending costs increased drastically, coupled with a major slowdown in land prices in Tokyo,
the stock market began to fall sharply in early 1990. The Nikkei 225 slid to 23,849 (December
2, 1990) from an opening of 37,189 (January 4, 1990),[9] which resulted in a loss of more than
35% within a year. Stock prices had officially collapsed by 1990. The downward trend
continued into 1991 as the Nikkei 225 slid to as low as 22,687 on November 1, 1991.[9]

Money supply and credit

Initially, the growth of the money supply decelerated in 1986 (the lowest growth rate was 8.3
percent in OctoberDecember 1986), which marked the end of the brief endaka
recession.[5][16] The trend was gradually reversed as it accelerated afterwards and exceeded
10 percent in AprilJune 1987.[16]

The growth of credit was more conspicuous than that of the money supply. During the bubble
period, banks were increasing borrowing activity and at the same time, also financing from
capital markets substantially increased against the backdrop of the progress of financial
deregulation and the increase of stock prices.[2] As a result, the funding of the corporate and
household sectors rapidly increased from around 1988 and recorded a rate of growth close
to 14 percent on a year-on-year basis in 1989.[16] Money supply continued to increase even
after the BOJ tightened its monetary policy and reached a peak in 1990, thereafter continuing
to mark still double-digit growth until the fourth quarter.[16] Money supply and credit dropped
sharply by 1991, as bank lending began to drop due to a shift in bank lending attitude.[2]

Causes

Monetary policy

The accelerating growth in terms of Japanese asset prices is closely associated with a
significant drop in short-term interest rates, notably between 1986 and 1987. The BoJ had
slashed the official discount rate from 5.00% (January 30, 1986) to 2.50% (February 23,
1987).[3][17] The official discount rate remained unchanged until May 30, 1989.

BOJ official discount rates:[6]

Effective date Official discount rate

January 30, 1986 5.00% to 4.50%

March 10, 1986 4.50% to 4.00%

April 21, 1986 4.00% to 3.50%

November 1, 1986 3.50% to 3.00%

February 23, 1987 3.00% to 2.50%

February 24, 1987 May 30, 1989 Unchanged at 2.50%

With the exception of the first discount rate cut, most of the discount cut was closely
motivated by international policy to intervene in the foreign exchange market. Despite
aggressive monetary easing by BOJ, the US dollar slid as much as 35% from 237/U$
(September 1985) to 153/U$ (February 1987).[8] Consequently, the move by the BOJ was
heavily criticized since such moves appeared to influence the outcome of the yen, a much
neglected domestic factor. As a result of such move, money growth was out of control. In the
1985-1987 period, money growth had been lingering around 8% before being pushed up to
more than 10% by the end of 1987.[5][16] By early 1988, growth had reached about 12% per
annum.[5][16]

The Bank of Japan has also been criticized for its role in fueling the asset bubble. The
movement of the BOJ to appreciate the Japanese yen rather than stabilizing the asset price
inflation and overheating meant little could be done during the peak of the crisis. Despite the
Bank of Japan stepping in to hike the interest rate by May 31, 1989, it seemed to have little
effect on the asset inflation. Indeed, land prices continued to rise until the early 1990s.[2]

Distortions in the tax system

Japan has one of the world's most complicated taxation systems, with its property tax
provisions deserving specific mention. These provisions have been widely abused for
speculation and have contributed to costlier land, especially within urban areas.[3][17][18]

The inheritance tax is very high in Japan, reported to be 75% of the market price for over 500
million yen until 1988, and it is still 70% of the market price for over 2 billion yen.[17] Yet the
appraisal of land for tax purposes used to be about one-half of the market value and the debt
was considered at face value during the bubble period.[17][18] In order to evade inheritance
tax, many wealthy individuals opt to borrow more money (since the interest rate was far
lower), hence reducing exposure to inheritance tax.[3]

Furthermore, given that capital gains on land are not taxed until the time of sale and interest
rate payments can be deducted from taxable income for companies and individuals investing
in assets (condominiums and offices), this has offered more incentive for wealthy individuals
and company to speculate the asset price.[17] The Japanese property tax stipulated that the
statutory standard property tax stood at 1.4%.[17] However, in terms of effective property tax,
it is much lower than the published statutory property tax.[17][18]

In the 1980s, local government imposed a tax on the market price land.[17] Since the
valuations did not rise in tandem with the actual rising market price, the effective property tax
would regress over the time. As a result, the Greater Tokyo area dropped to 0.06% of the
market price.[17] As the land price escalated much quicker than the tax rate, most Japanese
considered lands as asset rather than for production purposes. With strong expectations that
the land prices were likely to escalate, coupled with minimum property taxes, it makes more
sense to speculate the land price than to fully utilize the land for production purposes.[18]

The land lease law

As provided under the Japan Civil Code, the rights of a lessee and tenant are protected under
the Land Lease Law.[17] This law can be traced back during World War II, whereby most
heads of household were conscripted for military duty, leaving their families in danger of
being thrown out off their leased land.[17] For this reason, land leasehold contracts
automatically renew unless the landlord provides concrete reasoning to object.[17]

In the event of a dispute between the lessee and tenant, courts may convene a hearing in
order to ensure that the rent is fair and reasonable.[17] If the rent is set by the court, tenants
would pay according to the rent set by the court, which meant landlords could not raise the
rent more than the actual market price. Hence, rents are actually kept artificially low[17] and
the market fails to respond according to the rental price set by the market. Due to this, many
landlords refused to rent out their land for such steeply discount prices, but rather left the
land deserted in order to reap huge capital gains should land prices increase sharply.[17]

Changes in bank behaviour

Traditionally, Japanese are well known to be great deposit savers. However, the trend
seemed to reverse by the late 1980s as more Japanese opted to shift funding from banks to
the capital market leaving banks in a tight squeeze as lending costs grew with the shrinking
customer base.[3]

In fact, bank behaviour has gradually become aggressive since 1983 (even before the
monetary easing policy in Japan) after the ban on fund-raising in the securities market was
lifted around 1980.[2] However, major firms were not keen to utilize the bank as the source of
funding. For this reason, banks were forced to aggressively promote loans to smaller firms
backed by properties.[2] Soon, especially around 1987-1988, banks were even more apt to
lend to individuals backed by properties.[3] Evidently, even an ordinary salaryman could easily
borrow up to 100 million yen for any purpose, provided his house was used as collateral.[3]

Consequently, this had an adverse impact on whole Japanese asset bubble. Firstly, cheap
and easily available loans reduced the funding costs for the purpose of speculation.[19]
Second, stock rises, coupled by low interests rates, reduced the capital costs and aided
financing the capital market (e.g. convertible bonds, bonds with warrants, etc.).[19] Third, the
combination of a rise in land and stock prices pushed up the value of assets held by
corporations, which effectively increased their sources of funding since such these increased
the collateral value of the assets.[19]
Aftermath

Asset price

The asset price burst seemed to exert a strong impact on the overall Japanese economy. By
1992, urban land prices nationwide declined 1.7% from the peak.[10] However, the impact was
worse for land in the six major cities, as the average land prices (commercial, residential, and
industrial) dropped 15.5% from its peak.[10] Commercial, residential and industrial land prices
dropped 15.2%, 17.9%, and 13.1%, respectively.[10]

The entire asset price crisis was far worse, especially in the large business districts of Tokyo.
By 2004, prime "A" property in Tokyo's financial districts had slumped to less than 1 percent
of its peak, and Tokyo's residential homes were less than a tenth of their peak, but still
managed to be listed as the most expensive in the world until being surpassed in the late
2000s by Moscow and other cities. However, since 2012, Tokyo is once again the world's
most expensive city, followed by Osaka with Moscow as number 4. Tens of trillions of dollars
of value was wiped out with the combined collapse of the Tokyo stock and real estate
markets. Only in 2007 did property prices begin to rise; however, they began to fall in late
2008 due to the global financial crisis.[19]

Household impact

The entire crisis also badly affected direct consumption and investment within Japan.[20] As
a result, from a prolonged decline in the asset prices, there was a sharp decline in
consumption, which resulted in long term deflation in Japan.[20] The asset price burst also
badly affected consumer confidence since a sharp dip reduced household real income.[19]

Corporate impact

At the same time, since the economy was driven by its high rate of reinvestment, the crash hit
the stock market particularly hard. The Nikkei 225 at the Tokyo Stock Exchange plunged from
a height of 38,915 at the end of December 1989 to 14,309 at the end of August 1992.[20] By
11 March 2003, it plunged to the post-bubble low of 7,862 on March 11, 2003.[20] As
investments were increasingly directed out of the country, manufacturers were facing
difficulties to uphold its competitive advantage since most manufacturing firms lost some
degree of their technological edge.[20] Consequently, Japanese products became less
competitive overseas.

During the asset bubble period, most Japanese corporate balance sheets were backed by
assets. Hence, the asset prices influenced the corporate balance sheet. Owing to a lack of
corporate governance in Japanese companies,[6] most Japanese corporations had an
inclination to convince investors with their healthy balance sheet, since most investors
believe that such prices are likely bullish.[20] An important effect of the bubble collapse was
the deterioration of balance sheets. Since asset prices tumbled, increasing liabilities on a
long term basis projected a bad balance sheet to investors.[20] Many Japanese corporations
were facing huge difficulties to reduce the debt ratio resulting reluctance from the private
sector to increase investments.[20]

Financial and banking sector

The easily obtainable credit that helped create and engorge the real estate bubble continued
to be a problem for several years, and as late as 1997, banks were still making loans that had
a low probability of being repaid.[20]Loan officers and investment staff had a hard time
finding anything to invest in prospects that would return a profit. They would sometimes
resort to depositing their block of investment cash, as ordinary deposits, in a competing
bank, which would bring complaints from that bank's loan officers and investment staff.
Correcting the credit problem became even more difficult as the government began to
subsidize failing banks and businesses, creating many socalled "zombie businesses".[20]
Eventually, a carry trade developed in which money was borrowed from Japan, invested for
returns elsewhere, and then the Japanese were paid back, with a nice profit for the trader.[20]

The post bubble crisis also claimed several victims such as Sanyo Securities Co., Hokkaido
Takushoku Bank, and Yamaichi Securities Co. in November 1997.[20] By October 1998, the
failure of the Long-Term Credit Bank of Japan as well as Nippon Credit Bank in December the
same year worsened the financial system unrest,[20] drastically deteriorating consumer and
business sentiment and dealing a heavy blow to the economy. To address the crisis, the
government injected a total of 9.3 trillion yen in public funds into major banks in March 1998
and March 1999.[20]

The lost decade

The decade beyond 1991 is known as the Lost Decade ( ushinawareta jnen, lit.
"lost decade") in Japan, due to the gradual effect of the asset bubble collapse and effects.

Notes

1. "Japan's Bubble Economy" . www.sjsu.edu. Retrieved 2009-04-20.

2. Kunio Okina, Masaaki Shirakawa, and Shigenori Shiratsuka (February 2001):The Asset
Price Bubble and Monetary Policy: Japans Experience in the Late 1980s and the Lessons

3. Edgardo Demaestri, Pietro Masci (2003): Financial Crises in Japan and Latin America,
Inter-American Development Bank

4. http://fhayashi.fc2web.com/Prescott1/Postscript_2003/hayashi-prescott.pdf

5. Research and Statistics Department, Bank of Japan, April 1987b, Jousei Handan Shiryo:
62-nen Haru (Quarterly Economic Outlook: Spring 1987), Chousa Geppo (Monthly Bulletin)(in
Japanese)

6. Mieno, Yasushi, (2000) Ri wo Mite Gi wo Omou (Recall Faith to See What Makes a Profit),
Chuo Koronsha,(in Japanese)

7. Ohta, Takeshi (1991)Kokusai KinyuGenba Kara no Shougen (International Finance

Witness Concerned),Chuko Shinsho (in Japanese)

8. Bank of Japan: US.Dollar/Yen Spot Rate at 17:00 in JST, Average in the Month, Tokyo
Market for duration January 1980 ~ September 2010. Retrieved February 24, 2013

9. Yahoo Finance UK:[1] Nikkei 225 Historical prices,Nikkei 225 stocks. Retrieved February
24, 2013

10. Land Economy and Construction and Engineering Industry Bureau, Ministry of Land,
Infrastructure, Transport and Tourism (2004) Survey on average prices of housing land by
use and prefecture

11. Yoshito Masaru(1998):Nihon Keizai no Shinjitsu (Truth of the Japanese Economy), Toyo
Keizai Shimposha (in Japanese)

12. Yamaguchi Yutaka (1999): Asset Price and Monetary Policy: Japans Experience in New
Challenges for Monetary Policy, Federal Reserve Bank of Kansas City

13. Japan Real Estate Institute (2004) Index of Urban land Price by Use
14. "Population Census: I Daytime Population" . Statistics Bureau, Ministry of Internal Affairs
and Communications. 2002-03-29. Retrieved 2012-04-21.

15. Shapira, Phillip. Planning for Cities and Regions in Japan . Liverpool: Liberpool UP. p.96.

16. Research and Statistics Department, Bank of Japan(May 1989) Shouwa 63 Nendo no
Kinyu Oyobi Keizai no Doukou (Annual Review of Monetary and Economic Developments in
Fiscal 1988),Chousa Geppo (Monthly Bulletin),(in Japanese)

17. Yukio Noguchi (1991): Land prices and house prices in Japan, University of Chicago
Press

18. Nishimura Kiyohiko (1990): Nihon no Chikakettei Mechanism (The mechanism of land
price determination in Japan)

19. Iwamoto Yasushi, Fumio Ohtake, Makoto Saito, and Koichi Futagami (1999: Keizai
Seisaku to Makuro Keizai Gaku (Economic Policy and Macroeconomics), Nihon Keizai
Shimbunsha(in Japanese)

20. Economic and Social Research Institute (2003):Trend of the Japanese economy and
major topics in and after the 1970s

Additional References

Saxonhouse, Gary and Stern, Robert (Eds) (2004) Japan's Lost Decade: Origins,
Consequences and Prospects for Recovery (World Economy Special Issues), Wiley-Blackwell,
ISBN 978-1-4051-1917-7

Wood, Christopher (2005) The Bubble Economy: Japan's Extraordinary Speculative Boom of
the '80s and the Dramatic Bust of the '90s, Solstice Publishing, ISBN 978-979-3780-12-2

Daniell, Thomas (2008) After the Crash: Architecture in Post-Bubble Japan, Princeton
Architectural Press, ISBN 978-1-56898-776-7

Klarman, Seth A. (1991) Margin of Safety: Risk-Averse Value Investing Strategies for the
Thoughtful Investor, HarperCollins, ISBN 978-0-88730-510-8

External links

Core Economics animated Real Estate Rollercoaster Ride

Shigenori Shiratsuka: "Asset Price Bubble in Japan in the 1980s: Lessons for Financial and
Macroeconomic Stability" (PDF).(263KB) Bank of Japan Whitepaper (2003)

Allan I. MENDELOWITZ: After the Bubble: Is Japan's Recent Past America's Future? RIETI
speech summary, June 12, 2003

Japan Ministry of Land, Infrastructure, Transport and Tourism Land Price Data

Deloitte Report see page 10

Status Ireland: Japan: Property crash example (Japan Urban Land Index 1964 - 2007)

Last edited 2 months ago by Curly Turkey