Japanese asset price bubble

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 , which occurred from 1985 to 1986. 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 pressuressuch as the Plaza Accord and the policy of the Ministry of Finance to reduce the official discount rateare 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. 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. ==Timeline==

1985 • Plaza Accord ratified in September. • 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%. 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 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. == 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, the geographical distance from Tokyo metropolis and Osaka, and the historical importance of the city in the central government's policy. 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. 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). (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. 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 trend was gradually reversed as it accelerated afterwards and exceeded 10 percent in April–June 1987. 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. 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. 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. Money supply and credit dropped sharply by 1991, as bank lending began to drop due to a shift in bank lending attitude. == Causes ==

Plaza Accord The Plaza Accord was signed between Japan, the United Kingdom, France, West Germany, and the United States in 1985, aimed at reducing the imbalance in trade between the countries. At that time, Japan had a huge trade surplus, as the Japanese yen was weaker against U.S. dollar, while the United States suffered from a consistent trade deficit. While originally requested by France, the reason behind the accord was partially complaints by the US regarding the imbalance in the exchange rate between the foreign currencies and the dollar since most foreign products imported in the States had lower prices than the domestic products due to the weaker currencies against the dollar. After reaching a settlement in the Plaza Accord, central banks in participating countries started selling U.S. dollars. In Japan's case, demands for the yen increased, and the yen appreciated significantly. In 1985, the exchange rate of yen per dollar was 238. After the foreign exchange intervention followed by Plaza Accord, the exchange rate dropped to 165 yen per dollar in 1986 as the yen appreciated. This impacted exports in Japan to the States significantly, almost halving them in 1992 from their peak in 1986, whereas the trade deficit in the United States shrank after the Plaza Accord and the deficit cleared out in 1991. Due to the appreciation in the yen, Japanese companies suffered from huge losses in exports, as they had to sell their products in the States at higher prices than before to make a profit. Appreciation in the yen accelerated more than expected because speculators purchased yen and sold US dollars. This further appreciation in the yen shook the economy in Japan because the main source of economic growth in Japan was its export surplus. The GDP growth rate dropped from 5.2% in 1985 to 3.3% in 1986 and to 4.6% in 1987, and Japan experienced recession. To respond to this, the government shifted its focus on increasing demand within the country so that domestic products and services could still be consumed. To summarize the effect of the Plaza Accord in the long run, it did not succeed in equalizing the trade imbalance between Japan and the United States. Despite the fact that there was no major change in the exchange rate of the yen and the US dollar, the export surplus in Japan began to rise and the trade deficit in the States started to rise again in the 1990s. Overall, the Plaza Accord directly led to appreciation in the yen, and it incentivized lowering the discount rate in 1986 and 1987, which is considered to be one of the direct causes of the asset price bubble. The rising Deutsche Mark did not lead to an economic bubble or a recession in Germany. Financial liberalization When the United States was in recession in the early 1980s, the U.S. government pointed to the imbalance of exchange rate of the U.S. dollar and Japanese yen as the cause of recession, though the fundamental issue in recession was the fall in competition of domestic producers. To achieve depreciation of the U.S. dollar and appreciation of the Japanese yen, the United States focused on removing financial restrictions in Japan and increasing the demand for the Japanese yen. The financial restrictions in Japan at that time prevented the Japanese yen to be purchased and invested freely outside Japan. In 1983, the United States and Japan committee for Yen and U.S. dollar was established to reduce the friction in the exchange rate of Japanese yen and U.S. dollar. Through this committee, the United States recommended Japan deregulate and ease restrictions on financial and capital transactions. As a result, in 1984, restriction on future exchange transactions was removed in Japan, and it became possible for not only banks but companies to be involved in currency trading. The official discount rate remained unchanged until May 30, 1989. BOJ official discount rates: 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. However, major firms were not keen to use the bank as the source of funding. For this reason, banks were forced to aggressively promote loans to smaller firms backed by properties. 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.). 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. == 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. 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 2008 financial crisis. 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. Through sham loan restructurings, large Japanese banks provided a stream of credit to otherwise insolvent borrowers. The term "zombie company" was coined to describe Japanese companies that were unable to cover their debt servicing costs from current profits over an extended period of time. Zombie companies reduce the profits for competitive firms, depress job creation, lower productivity and discourage investments. 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. Loan officers and investment staff had a hard time finding anything to invest in that had the prospect of returning 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 so-called "zombie businesses". 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. The post-bubble crisis also claimed several victims such as Sanyo Securities Co., Hokkaido Takushoku Bank, and Yamaichi Securities Co. in November 1997. 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, 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. Lost Decades The decade beyond 1991 is known as in Japan, due to the gradual effect of the asset bubble collapse and effects. The Lost Decade eventually became the ‘lost 20 years,’ since Japanese GDP in 2017 was only 2.6% higher than it had been in 1997, with an annualized growth rate of 0.13%. == Government policy ==

Government spending During a few years after the bubble crisis, Japan experienced a sharp decline in the GDP growth rate. In 1993, the Japanese government decided on a major increase in government spending. It was aimed to increase domestic demand and stimulate consumption to help pull the economy from recession. However, increasing government spending did not turn as effective as the government predicted it to be. The consumption in households increased in 1993 compared to the previous year and continued increasing for several years, but it started declining again in 1998. It is considered that consumer confidence was at the lowest from uncertainty in the future after the bubble crisis, and consumers preferred to save rather than to spend in such a situation. The budget deficit expanded from increased government spending and decreased tax revenue from the recession. Zero interest-rate policy in 1990 Zero interest-rate policy starting in 1999 Negative interest policy started in 2016 The central bank imposed a zero-interest policy in the late 1990s to get the economy out of recession after the bubble crisis. The nominal interest rate was reduced from 2% to 0.5% in 1995. Consecutively, the central bank reduced the interest rate to 0.32% and to 0.05% in 1998 and 1999 respectively. It is called the zero-interest policy as the central bank lowered the interest rate as close to 0% as possible. The objective of zero interest rate was to stimulate the economy by making it easier for companies to borrow funds from banks and helping them make investments. As the GDP growth rate recovered back to 3% in 2000 first time after 1996, the government perceived it as the beginning of recovery from recession and stopped the zero interest rate policy by raising the interest rate to 1%. However, the GDP growth rate again tanked to 0.5% the next year in 2001, and the central bank ended up reducing the interest rate again to 0.35% in 2001. Overall, the depression after the bubble crisis was longer than expected. In addition, the uncertainty about the future of the economy was high during the recession, and therefore, lowering the interest rate was not so effective in stimulating investment and the economy overall at that time. The government took the policy of quantitative easing, in 2001. They expanded the maximum amount of deposits in the central bank and lowered the call rate between banks nearly to zero. This marked a better policy for recovering the economy. The economy recovered slowly after 2001, and the quantitative easing was stopped in 2006. ==Notes==