Japanese asset price bubble

Overview

The Japanese asset price bubble (バブル景気, baburu keiki; lit. 'bubble economy') was an economic bubble in Japan from 1986 to 1991 in which real estate and stock market prices were greatly inflated. In early 1992, this price bubble burst and the country's economy stagnated. The bubble was characterized by rapid acceleration of asset prices and overheated economic activity, as well as an uncontrolled money supply and credit expansion. More specifically, over-confidence and speculation regarding asset and stock prices were associated with financial policy deemed to exacerbate them. Through the creation of economic policies that cultivated the marketability of assets, eased the access to credit, and encouraged speculation, the Japanese government started a prolonged and exacerbated Japanese asset price bubble. 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). By late 1991, other asset prices began to fall. Even though asset prices had visibly collapsed by early 1992, the economy's decline continued for more than a decade. This decline resulted in a huge accumulation of non-performing asset loans (NPL), causing difficulties for many financial institutions. The bursting of the Japanese asset price bubble contributed to what many call the Lost Decade. Japan's average nationwide land prices finally began to increase year-over-year in 2018, with a 0.1% rise over 2017 price levels.

Background

Early research 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 monetary policy but decided to delay the decision in view of economic uncertainty related to Black Monday of 1987 in the United States. Later research argued an alternative view: that the BOJ's reluctance to tighten 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 (日本の円高不況, Nihon no endakafukyō; lit. "recession caused by the appreciation of Japanese Yen"), which occurred from 1985 to 1986. The endaka recession has been closely linked to the Plaza Accord of September 1985, which led to the strong appreciation of the Japanese yen. The term endaka fukyō would in the future be used repeatedly to describe the many times the yen surged and the economy went into recession, posing a conundrum for business and government, trade partners, and anti-monetary interventionists. Economist Richard Werner says that external pressures—such as the Plaza Accord and the policy of the Ministry of Finance to reduce the official discount rate—are insufficient to explain the actions taken by the Bank of Japan that led to the bubble. The strong appreciation of the yen eroded the Japanese economy, which was led by exports and capital investment for export purposes. In fact, in order to overcome the endaka recession and stimulate the local economy, an aggressive fiscal policy was adopted, mainly through the expansion of public investment. Simultaneously, the BOJ declared that curbing the yen's appreciation was a national priority. To prevent the yen from appreciating further, monetary policymakers pursued aggressive monetary easing and slashed the official discount rate to as low as 2.5% by February 1987. The move initially failed to curb further appreciation of the yen, which rose from 200.05 ¥/U$ (first round of 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 [the] 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". At this point, the US urged the other countries to raise interest rates, fearing the effects of further depreciation of the dollar on the budget and current account deficit. 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.

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 expressed concern over excessive monetary easing, particularly after the money supply and asset prices rose sharply. 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.

The table below demonstrates the monthly average of the U.S. dollar/Yen spot rate (Yen per USD) at 17:00 JST.

1985

Plaza Accord ratified in September. Japanese yen strengthened from 236.91JPY/USD (September) to 202.75JPY/USD (December). "endaka recession" worsened in fourth quarter. Nikkei 225 moved above 13,000 by December 12, 1985. 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.

1986

In addressing the appreciation of the Japanese yen, the BOJ began to ease the monetary policy, cutting the official discount rate from 5.0% to 3.0%. Japanese yen touched a new high against the US dollar (154.11JPY/USD) in August before settling down at 162.13¥/U$ in December. Nikkei 225 strengthened further from 13,024 (January 6, 1986) to 18,821 (December 26, 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). Commercial land prices (per 1sq. metre) in Osaka rose 35% compared to the previous year.

1987

Japan's economy recovered, and entered into a year of expansion by the first quarter. In accordance with the Louvre Accord, BOJ cut the official discount rate from 3.0% to 2.5%. BOJ expressed concern over the asset inflation and signaled the possibility of a monetary tightening policy in the summer of 1987. Japanese yen continued to be strengthened against US dollar, touching a new high of 128.25JPY/USD by December. Nikkei 225 broke the 20,000 level mark by January 30, 1987, and recorded a new high of 26,118 on September 1, 1987. Nikkei 225 slipped back to 21,564 by December 28, 1987, due to economic uncertainties after the Black Monday of NYSE. As land supply within Tokyo metropolis was scarce, investors began to speculate on 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.

1988

Japanese yen strengthened to 123.16JPY/USD by November before weakening slightly to 123.63JPY/USD in December. Nikkei 225 broke the 30,000 level mark and recorded a new high of 30,159 on December 28, 1988. Asset price growth in Tokyo metropolis began to stagnate, especially in residential areas and commercial districts. Lands in certain wards in Tokyo metropolis began to drop. Other urban lands 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.

1989

Consumption tax was introduced in Japan in April 1989. BOJ tightened monetary policy by hiking the official discount rate from 2.5% to 4.25% by late December 1989. Japanese Yen fell against US dollar, falling as low as 145.06JPY/USD by September. Nikkei 225 touched a then-historical all-time high of 38,957.44 on December 29, 1989. Land prices crashed in Tokyo metropolis as residential land on average 1 sq. metre declined by 4.2%, while land prices in commercial districts and industrial sites in Tokyo metropolis remained stagnant. Adjacent prefectures, especially Kanagawa prefecture, also began to be affected due to their geographical proximity to Tokyo metropolis. In Yokohama (Kanagawa), land prices in residential areas were either stagnant or dropped slightly compared to 1988. All other major urban lands in Japan remained unaffected by the asset collapse over Tokyo.

1990

BOJ continued to tighten monetary policy by pushing the official discount rate from 4.25% to 6.00%. Japanese yen weakened to as low as 158.50JPY/USD by April but began to strengthen in the second half of 1990; it touched as high as 129.01JPY/USD by November. Nikkei 225 dropped sharply from 37,189 (January 4, 1990) to 23,849 (December 28, 1990), losing over 35% in value in 1990. Asset prices in the Tokyo metropolis stabilized from moving downwards. All other major urban lands in Japan remained on an upward trend.

1991

Japanese yen resumed the upward trend against US dollar, strengthening back to 129.07JPY/USD by December. Nikkei 225 dropped to 22,984 on December 30, 1991, compared to 23,293 on January 4, 1991. 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.

2000–2002

The introduction of the Euro in 1999 led to the normalization of property values across major European capital cities. The Dutch pension manager PVF Achmea, Achmea Global Investors pioneered the novel concept of a global property sector fund as the Euro and US Dollar valuations aided in investment management allocation decisions. Only till late 2000, the Asian and Global lead property securities manager Dhr. O. Silva of Achmea unify all three regions on a relative valuation basis, it was only then evident a tax-efficient property securitization of yielding prime real estate as J-REIT structure could be a practical asset creation model to help stop the decade long asset deflation suffered in Japan. In consultation with the leading property developers, Mitsubishi Estate Archived 2015-08-28 at the Wayback Machine and Mitsui Fudosan, along with Japan's FSA and backed by Dutch pension managers, the first draft of the J-REIT legislature was adopted in November 2000. The first J-REIT to list on the Tokyo Stock exchange was Nippon Building Fund (TSE: 8951) sponsored by Mitsui Fudosan (TSE: 8801). As banks and property developers deleveraged their balance sheets, coupled with the liquidity provided by the Dutch pension manager, Tokyo land values for condos and offices stabilized in 2002.

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, the geographical distance from Tokyo metropolis and Osaka, and the historical importance of the city in the central government's policy. Cities within prefectures closer to the Tokyo metropolis experienced far greater asset price inflation compared to cities located in prefectures further from the Tokyo metropolis. For definition purposes, the Japan Real Estate Institute has classified Tokyo metropolis (including 23 special wards), Yokohama (Kanagawa), Nagoya (Aichi), Kyoto (Kyoto), Osaka (Osaka), and Kobe (Hyogo) 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. Nationwide, statistics showed that commercial land, residential land, and industrial land prices were up by 80.9%, 51.1%, and 51.7%, respectively. 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 supply. The government's policies that concentrated 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. By 1985, land within Tokyo commercial districts was insufficient to fulfill market demand. As a result, land prices in Tokyo commercial districts increased sharply within a year. The average price per 1 sq. meter for land in Tokyo commercial districts in 1984 was 1,333,000¥ (U$5,600 assuming in 1984 that 1 U$=238¥). In just a year, the average price per 1 sq. meter for land in Tokyo commercial districts increased to 1,894,000¥ (U$7,958 assuming in 1985 average 1 U$=238¥). This roughly translates to an increase of 42% over just a year. By 1986, the average price per 1 sq. meter 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. meter (in 1985) to 431,000¥/U$2,565 per 1 sq. meter (in 1986), an increase of 45%. Osaka also experienced rapid growth in land prices, especially in commercial districts. Land prices in Osaka gained 35% to a price of 1,159,000¥/1 sq. meter (1986) from an average 855,000¥/1 sq. meter (1985). Since Osaka served primarily as a commercial center in Japan, land prices in Osaka tend to be higher than those of most other urban lands in Japan. By 1987, due to overwhelming demand, the price of residential land in Tokyo increased to 890,000¥/1 sq. meter (U$6,180 based on the assumption 1U$ = 144¥), and the price of commercial land increased to 6,493,000¥/1 sq. meter (U$45,090). Consequently, investors flocked to prefectures surrounding the Tokyo metropolis, especially prefectures within the Greater Tokyo Area. Investors were more favorable to prefectures located in Southern Kanto than 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. meter) 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. meter) were 153,000¥, Utsunomiya were 179,000¥ and Maebashi were 135,000¥ in 1986. Osaka land prices continued to increase, especially in the commercial area, as the prices increased to 2,025,000¥/1 sq. meter in 1987. Kyoto (Kyoto prefecture) and Kobe (Hyogo prefecture) also saw a sharp increase in land prices, especially in commercial areas that gained 31% and 23%, respectively. 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. 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. Prime land in Ginza district and areas in Central Tokyo continued to rise. 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. By 1989, land prices in commercial districts in Tokyo began to stagnate, while land prices in residential areas in Tokyo actually dipped by 4.2% compared to 1988. 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. meter (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 gains in land prices. All other urban cities in Japan had yet to see the impact of a slowdown in Tokyo. At their peak, prices in central Tokyo were such that the 1.15 square kilometer Tokyo Imperial Palace grounds were estimated to be worth more than the entire real estate value of California. Between 1990 and mid-1991, most urban lands had already reached their peak. The lag effect from the fall of Nikkei 225 pushed down the prices of urban land in most parts of Japan by the end of 1991. The bubble collapse was officially declared in early 1992 – as land prices dropped the most in this period. Tokyo experienced the worst of the catastrophe. Land prices in residential areas on average 1 sq/meter slid 19% while commercial land prices declined 13% compared to 1991. Overall land prices in residential areas and commercial districts in Tokyo fell to the lowest level since 1987.

Stock prices

Stock trading volumes accounted for by corporations rose from 19% to 39% during the 1980s, while cross ownership rose from 39% in 1950 to 67%. This reduced the number of shares available on the public markets for daily trading, making share prices easier to manipulate and detached from corporate leadership. In the 1980s, the direction of stock prices in Japan was largely determined by the asset market, particularly land prices, in Japan. Looking at the monthly performance of Nikkei 225 in 1984, the index largely moved within 9900–11,600 range. 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. The major surge was obvious by 1986, as the Nikkei 225 gained close to 45% within a year. The trend continued throughout 1987 when it touched as high as 26,029 by early August 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. This translated to a gain of more than 224% since January 2, 1985. 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. 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. 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 from an opening of 38,921 (January 4, 1990) to a yearly low of 21,902 (December 5, 1990), which resulted in a loss of more than 43% within a year. Stock prices had officially collapsed by the end of 1990. The downward trend continued through the early 1990s, as the Nikkei 225 opened as low as 14,338 on August 19, 1992.