Japanese asset price bubble

Two days shy of a new year, the Japanese Nikkei 225 price weighted stock index registered an all Time high of 38,957 in December 29, 1989. The rise to this level was so steep that it exhausted all of its momentum and suffered a vicious fall to 21,000 by the fourth quarter of the following year. 21 years later, the Nikkei 225 index is still over 70% below its 1989 peak at a level around 11,000. This is the aftermath of one of the greatest financial bubbles in history, the Japanese asset bubble. At a quick glance, Japan’s economy looked vibrant. With well known giants such as Toyota, Sony, Honda, Nissan, Yamaha and various company brands that takes up top global spots in terms of market capitalization, popularity and quality. Japan also boasts a currency that hovers close to parity with other major world currencies and an economy that trails behind the shadows of the USA. However, Japan’s economy is currently stagnant and growing at a very slow pace. It is projected that within a few years time, if the country’s growth rate remains at its current level, China would soon take over its spot as the second largest economy.

The bubble economy of Japan in the 80s closely resembled the tulip mania of the 1630s where the price of land, art and even golf club membership rose to extraordinarily high levels. The total value of land in Japan in 1980 at one point was over four times the real estate value of the entire United States. Land ownership in Japan projects status for its owners, for a country that is generally mountainous, real estate was seen as a very limited and priced commodity.

Land development is scarce because of the nature of the Japanese terrain, this made it look certain that real estate values would always rise due to its scarcity. However, that proved to be a false assumption. Land is already one of the most illiquid assets to own, the Japanese solidified real estate’s status by encouraging “long termism”. The government raised short term property gain to 150%, a number that only the most desperate home sellers would take. At the same time, Japanese banks raised their capital reserve ratio allowing them to technically print or create money in the form of new real estate backed loans. With this in place, Japanese banks capital grew in size as a direct result of investor valuations of its stocks.

The increased capital allowed banks to lend more, providing more fuel for the already blazing hot real estate market. As the financial sector’s stocks rose so did the rest of the stocks across the board. The result of this was a country with a very tight fiscal policy as shown with the ridiculously high short term capital gains tax and at the same time a very loose monetary policy that allowed banks to provide more fuel for the bubble economy.

Bank of Japan governor Yasushi Mieno was well aware that an asset bubble is already in place and his objective was to slowly deflate it allowing a smooth landing instead of a crash. Mieno raised the discount rate in December of 1989 and by January of the following year, the Nikkei index fell from a peak of 38,915 to 35,000. He also expressed publicly that the aim of Bank of Japan was to slowly deflate real estate prices. The same party that manipulated the ascent of asset prices in Japan cannot successfully control its way down, instead, the stock market fell and it brought down the property market with it. The move to a higher interest rate surely got its consequence in the form of an equities market crash. By 1992, property prices in Tokyo fell to as much as 60% in value. The central bank of Japan gradually lowered interest rates in an effort to counter the crash. The discount rate got so low that banks were offering a negative interest on deposits. In 1995 Japan has experienced its first bank run when depositors rushed to their banks in order to withdraw their money. A total of 60 billion Yen was withdrawn that day. The continued decline in property prices sent real estate companies into a financial meltdown. The government bailed out most of these mortgage companies. This scenario was so recent that in logical terms, it could take a long time before this mistake is repeated elsewhere. However, the same exact scenario happened across the pacific 12 years after the fact. This time it took place in the United States with its own housing market bubble as if planet finance turned a blind eye on logic when faced with potential quick gains.
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