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.
Timeline
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.
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. 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%.