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The was an
economic bubble An economic bubble (also called a speculative bubble or a financial bubble) is a period when current asset prices greatly exceed their intrinsic valuation, being the valuation that the underlying long-term fundamentals justify. Bubbles can be c ...
in
Japan Japan ( ja, 日本, or , and formally , ''Nihonkoku'') is an island country in East Asia. It is situated in the northwest Pacific Ocean, and is bordered on the west by the Sea of Japan, while extending from the Sea of Okhotsk in the n ...
from 1986 to 1991 in which
real estate Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more genera ...
and
stock In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a compan ...
market prices were greatly inflated. In early 1992, this price bubble burst and Japan's economy stagnated. The bubble was characterized by rapid acceleration of asset prices and overheated economic activity, as well as an uncontrolled
money supply In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circu ...
and
credit expansion The credit cycle is the expansion and contraction of access to credit over time. Some economists, including Barry Eichengreen, Hyman Minsky, and other Post-Keynesian economists, and some members of the Austrian school, regard credit cycles as the fu ...
.Kunio Okina, Masaaki Shirakawa, and Shigenori Shiratsuka (February 2001):The Asset Price Bubble and Monetary Policy: Japan's Experience in the Late 1980s and the Lessons More specifically, over-confidence and
speculation In finance, speculation is the purchase of an asset (a commodity, goods, or real estate) with the hope that it will become more valuable shortly. (It can also refer to short sales in which the speculator hopes for a decline in value.) Many ...
regarding asset and stock prices were closely associated with excessive monetary easing policy at the time.Edgardo Demaestri, Pietro Masci (2003): Financial Crises in Japan and Latin America, Inter-American Development Bank Through the creation of economic policies that cultivated the marketability of assets, eased the access to credit, and encouraged speculation, the
Japanese government The Government of Japan consists of legislative, executive and judiciary branches and is based on popular sovereignty. The Government runs under the framework established by the Constitution of Japan, adopted in 1947. It is a unitary state, ...
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 The is the central bank of Japan. Nussbaum, Louis Frédéric. (2005). "Nihon Ginkō" in The bank is often called for short. It has its headquarters in Chūō, Tokyo. History Like most modern Japanese institutions, the Bank of Japan was foun ...
(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 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. 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.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) Later research argued an alternative view, that 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 endaka recession has been closely linked to the
Plaza Accord The Plaza Accord was a joint–agreement signed on September 22, 1985, at the Plaza Hotel in New York City, between France, West Germany, Japan, the United Kingdom, and the United States, to depreciate the U.S. dollar in relation to the French ...
of September 1985, which led to the strong appreciation of the
Japanese yen The is the official currency of Japan. It is the third-most traded currency in the foreign exchange market, after the United States dollar (US$) and the euro. It is also widely used as a third reserve currency after the US dollar and the ...
.Mieno, Yasushi, (2000) Ri wo Mite Gi wo Omou (Recall Faith to See What Makes a Profit), Chuo Koronsha,(in Japanese) The term ''endaka fukyō'' would in the future be used repeatedly to describe the many times the yen surged and the economy went into recession, posing a conundrum for business and government, trade partners, and anti-monetary interventionists. The strong appreciation of the yen eroded the Japanese economy since the economy was led by exports and
capital investment Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing i ...
for export purposes. In fact, in order to overcome the ''endaka'' recession and stimulate the local economy, an aggressive
fiscal policy In economics and political science, fiscal policy is the use of government revenue collection ( taxes or tax cuts) and expenditure to influence a country's economy. The use of government revenue expenditures to influence macroeconomic variabl ...
was adopted, mainly through the expansion of public investment. Simultaneously, the BOJ declared that curbing the yen's appreciation was a national priority.Ohta, Takeshi (1991)Kokusai Kin'yu—Genba Kara no Shougen (International Finance—Witness Concerned), Chuko Shinsho (in Japanese) To prevent the yen from appreciating further, monetary policymakers pursued aggressive monetary easing and slashed the official discount rate to as low as 2.5% by February 1987. The move initially failed to curb further appreciation of the yen, which rose from 200.05 ¥/U$ (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 exception of the first discount rate cut, the subsequent four are heavily influenced by the US: hesecond and the third cut was a joint announcement to cut the discount rate while the fourth and fifth was due to joint statement feither Japan-US or the G-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. 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 Quantitative easing (QE) is a monetary policy action whereby a central bank purchases predetermined amounts of government bonds or other financial assets in order to stimulate economic activity. Quantitative easing is a novel form of monetary pol ...
, particularly after the money supply and asset prices rose sharply. Nonetheless,
Black Monday Black Monday refers to specific Mondays when undesirable or turbulent events have occurred. It has been used to designate massacres, military battles, and stock market crashes. Historic events *1209, Dublin – when a group of 500 recently arriv ...
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 The United States dollar ( symbol: $; code: USD; also abbreviated US$ or U.S. Dollar, to distinguish it from other dollar-denominated currencies; referred to as the dollar, U.S. dollar, American dollar, or colloquially buck) is the official ...
/ Yen spot rate (Yen per USD) at 17:00 JST.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


Timeline


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,Yoshito Masaru(1998):Nihon Keizai no Shinjitsu (Truth of the Japanese Economy), Toyo Keizai Shimposha (in Japanese) the geographical distance from
Tokyo Tokyo (; ja, 東京, , ), officially the Tokyo Metropolis ( ja, 東京都, label=none, ), is the capital and largest city of Japan. Formerly known as Edo, its metropolitan area () is the most populous in the world, with an estimated 37.46 ...
metropolis and
Osaka is a designated city in the Kansai region of Honshu in Japan. It is the capital of and most populous city in Osaka Prefecture, and the third most populous city in Japan, following Special wards of Tokyo and Yokohama. With a population of ...
,Yamaguchi Yutaka (1999): Asset Price and Monetary Policy: Japan's Experience in New Challenges for Monetary Policy, Federal Reserve Bank of Kansas City and the historical importance of the city in the central government's policy. Cities within
prefectures A prefecture (from the Latin ''Praefectura'') is an administrative jurisdiction traditionally governed by an appointed prefect. This can be a regional or local government subdivision in various countries, or a subdivision in certain international ...
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, Japan Real Estate Institute has classified Tokyo metropolis (including 23 special wards),
Yokohama is the second-largest city in Japan by population and the most populous municipality of Japan. It is the capital city and the most populous city in Kanagawa Prefecture, with a 2020 population of 3.8 million. It lies on Tokyo Bay, south of T ...
(
Kanagawa is a prefecture of Japan located in the Kantō region of Honshu. Kanagawa Prefecture is the second-most populous prefecture of Japan at 9,221,129 (1 April 2022) and third-densest at . Its geographic area of makes it fifth-smallest. Kanagaw ...
),
Nagoya is the largest city in the Chūbu region, the fourth-most populous city and third most populous urban area in Japan, with a population of 2.3million in 2020. Located on the Pacific coast in central Honshu, it is the capital and the most po ...
(
Aichi is a prefecture of Japan located in the Chūbu region of Honshū. Aichi Prefecture has a population of 7,552,873 () and a geographic area of with a population density of . Aichi Prefecture borders Mie Prefecture to the west, Gifu Prefecture ...
),
Kyoto Kyoto (; Japanese: , ''Kyōto'' ), officially , is the capital city of Kyoto Prefecture in Japan. Located in the Kansai region on the island of Honshu, Kyoto forms a part of the Keihanshin metropolitan area along with Osaka and Kobe. , the c ...
(
Kyoto Kyoto (; Japanese: , ''Kyōto'' ), officially , is the capital city of Kyoto Prefecture in Japan. Located in the Kansai region on the island of Honshu, Kyoto forms a part of the Keihanshin metropolitan area along with Osaka and Kobe. , the c ...
),
Osaka is a designated city in the Kansai region of Honshu in Japan. It is the capital of and most populous city in Osaka Prefecture, and the third most populous city in Japan, following Special wards of Tokyo and Yokohama. With a population of ...
(
Osaka is a designated city in the Kansai region of Honshu in Japan. It is the capital of and most populous city in Osaka Prefecture, and the third most populous city in Japan, following Special wards of Tokyo and Yokohama. With a population of ...
), and
Kobe Kobe ( , ; officially , ) is the capital city of Hyōgo Prefecture Japan. With a population around 1.5 million, Kobe is Japan's seventh-largest city and the third-largest port city after Tokyo and Yokohama. It is located in Kansai region, whi ...
( Hyogo)Japan Real Estate Institute (2004) Index of Urban land Price by Use 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 policies to solely concentrate its economic activities in Tokyo, and the lack of diversification of
economic activities Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analyze ...
in other local cities, are also partly to blame for the bubble. By 1985, land within Tokyo commercial districts were unable to fulfill
market demand In economics, demand is the quantity of a goods, good that consumers are willing and able to purchase at various prices during a given time. The relationship between price and quantity demand is also called the demand curve. Demand for a specifi ...
. 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 most other urban lands 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. meter (U$6,180 based on the assumption 1U$ = 144¥) and commercial land 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 Mito may refer to: Places *Mito, Ibaraki, capital city of Ibaraki Prefecture, Japan *Mito, Aichi, a Japanese town *Mito, Shimane, a Japanese town * Mitō, Yamaguchi, a Japanese town * Mito District, a district in the province of Concepción, Per ...
(
Ibaraki prefecture is a prefecture of Japan located in the Kantō region of Honshu. Ibaraki Prefecture has a population of 2,871,199 (1 June 2019) and has a geographic area of . Ibaraki Prefecture borders Fukushima Prefecture to the north, Tochigi Prefecture ...
),
Utsunomiya is the prefectural capital city of Tochigi Prefecture in the northern Kantō region of Japan. , the city had an estimated population of 519,223, and a population density of . The total area of the city is . Utsunomiya is famous for its '' gyoza' ...
(
Tochigi prefecture is a prefecture of Japan located in the Kantō region of Honshu. Tochigi Prefecture has a population of 1,943,886 (1 June 2019) and has a geographic area of 6,408 km2 (2,474 sq mi). Tochigi Prefecture borders Fukushima Prefecture to th ...
) and
Maebashi is the capital city of Gunma Prefecture, in the northern Kantō region of Japan. , the city had an estimated population of 335,352 in 151,171 households, and a population density of 1100 persons per km2. The total area of the city is . I ...
(
Gunma prefecture is a prefecture of Japan located in the Kantō region of Honshu. Gunma Prefecture has a population of 1,937,626 (1 October 2019) and has a geographic area of 6,362 km2 (2,456 sq mi). Gunma Prefecture borders Niigata Prefecture and Fuku ...
). 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 Ginza ( ; ja, 銀座 ) is a district of Chūō, Tokyo, located south of Yaesu and Kyōbashi, west of Tsukiji, east of Yūrakuchō and Uchisaiwaichō, and north of Shinbashi. It is a popular upscale shopping area of Tokyo, with numerous i ...
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 The is the main residence of the Emperor of Japan. It is a large park-like area located in the Chiyoda district of the Chiyoda ward of Tokyo and contains several buildings including the where the Emperor has his living quarters, the where va ...
grounds were estimated to be worth more than all the land in the entire state of California. Between 1990 and mid-1991, most urban lands had already reached their peak. The lag effect from the fall of
Nikkei 225 The Nikkei 225, or , more commonly called the ''Nikkei'' or the ''Nikkei index'' (), is a stock market index for the Tokyo Stock Exchange (TSE). It has been calculated daily by the '' Nihon Keizai Shimbun'' (''The Nikkei'') newspaper since 19 ...
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 Cross ownership is a method of reinforcing business relationships by owning stock in the companies with which a given company does business. Heavy cross ownership is referred to as circular ownership. The Japanese economy is alleged to be heavily ...
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 In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that c ...
market, particularly land prices, in Japan. Looking at the monthly performance of
Nikkei 225 The Nikkei 225, or , more commonly called the ''Nikkei'' or the ''Nikkei index'' (), is a stock market index for the Tokyo Stock Exchange (TSE). It has been calculated daily by the '' Nihon Keizai Shimbun'' (''The Nikkei'') newspaper since 19 ...
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 In finance, speculation is the purchase of an asset (a commodity, goods, or real estate) with the hope that it will become more valuable shortly. (It can also refer to short sales in which the speculator hopes for a decline in value.) Many s ...
on stock prices. However, this also portrays the weaknesses of
corporate governance Corporate governance is defined, described or delineated in diverse ways, depending on the writer's purpose. Writers focused on a disciplinary interest or context (such as accounting, finance, law, or management) often adopt narrow definitions ...
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.


Money supply and credit

Initially, the growth of the
money supply In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circu ...
decelerated in 1986 (the lowest growth rate was 8.3 percent in October–December 1986), which marked the end of the brief "endaka recession".Research and Statistics Department, Bank of Japan(May 1989) "Shouwa 63 Nendo no Kin'yu Oyobi Keizai no Doukou (Annual Review of Monetary and Economic Developments in Fiscal 1988),"Chousa Geppo (Monthly Bulletin),(in Japanese) The trend was gradually reversed as it accelerated afterwards and exceeded 10 percent in April–June 1987. The growth of
credit Credit (from Latin verb ''credit'', meaning "one believes") is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately (thereby generating a debt) ...
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 A capital market is a financial market in which long-term debt (over a year) or equity-backed securities are bought and sold, in contrast to a money market where short-term debt is bought and sold. Capital markets channel the wealth of savers ...
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 A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and r ...
and
household A household consists of two or more persons who live in the same dwelling. It may be of a single family or another type of person group. The household is the basic unit of analysis in many social, microeconomic and government models, and is i ...
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


The Plaza Accord

The
Plaza Accord The Plaza Accord was a joint–agreement signed on September 22, 1985, at the Plaza Hotel in New York City, between France, West Germany, Japan, the United Kingdom, and the United States, to depreciate the U.S. dollar in relation to the French ...
was signed between
Japan Japan ( ja, 日本, or , and formally , ''Nihonkoku'') is an island country in East Asia. It is situated in the northwest Pacific Ocean, and is bordered on the west by the Sea of Japan, while extending from the Sea of Okhotsk in the n ...
, the
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and ...
,
France France (), officially the French Republic ( ), is a country primarily located in Western Europe. It also comprises of Overseas France, overseas regions and territories in the Americas and the Atlantic Ocean, Atlantic, Pacific Ocean, Pac ...
,
West Germany West Germany is the colloquial term used to indicate the Federal Republic of Germany (FRG; german: Bundesrepublik Deutschland , BRD) between its formation on 23 May 1949 and the German reunification through the accession of East Germany on 3 ...
, and the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...
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 The is the official currency of Japan. It is the third-most traded currency in the foreign exchange market, after the United States dollar (US$) and the euro. It is also widely used as a third reserve currency after the US dollar and the ...
was weaker against
U.S. dollar The United States dollar ( symbol: $; code: USD; also abbreviated US$ or U.S. Dollar, to distinguish it from other dollar-denominated currencies; referred to as the dollar, U.S. dollar, American dollar, or colloquially buck) is the official ...
, while the United States suffered from a consistent
trade deficit The balance of trade, commercial balance, or net exports (sometimes symbolized as NX), is the difference between the monetary value of a nation's exports and imports over a certain time period. Sometimes a distinction is made between a balanc ...
. The reason behind the accord was partially complaints by the US regarding the imbalance in the exchange rate between the yen and the dollar since most Japanese products imported in the States had higher quality and lower prices than the domestic products due to the weaker yen 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 Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is ofte ...
growth rate dropped from 6.3% in 1985 to 2.8% in 1986, and Japan experienced
recession In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various ...
. To respond to this recession, 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.


Financial liberalization

When the United States was in recession in 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 Deregulation is the process of removing or reducing state regulations, typically in the economic sphere. It is the repeal of governmental regulation of the economy. It became common in advanced industrial economies in the 1970s and 1980s, as a ...
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 foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all asp ...
. Later in the same year, regulation on converting foreign funds into funds Japanese yen was also eliminated. The abolition of financial restrictions in Japan opened up the Japanese financial market to international trade, and the demand for Japanese yen increased accordingly. At the same time, there was an increasing number of loans from banks to companies for real estate investment purposes in 1985. It partly became the cause of asset price bubble as financial liberalization increased the investment in real estate by companies even before the new monetary policy took hold in 1986.


Monetary policy

The accelerating growth in terms of Japanese asset prices is closely associated with a significant drop in short-term
interest rates An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, th ...
, notably between 1986 and 1987. The
BoJ The is the central bank of Japan. Nussbaum, Louis Frédéric. (2005). "Nihon Ginkō" in The bank is often called for short. It has its headquarters in Chūō, Tokyo. History Like most modern Japanese institutions, the Bank of Japan was fo ...
had slashed the official discount rate from 5.00% (January 30, 1986) to 2.50% (February 23, 1987).Yukio Noguchi (1991): Land prices and house prices in Japan, University of Chicago Press The official discount rate remained unchanged until May 30, 1989. BOJ official discount rates: 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). 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 a 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. By early 1988, growth had reached about 12% per annum. 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.


Distortions in the tax system

Japan has one of the world's most complicated taxation systems, with its
property tax A property tax or millage rate is an ad valorem tax on the value of a property.In the OECD classification scheme, tax on property includes "taxes on immovable property or net wealth, taxes on the change of ownership of property through inher ...
provisions deserving specific mention. These provisions have been widely abused for speculation and have contributed to costlier land, especially within urban areas.Nishimura Kiyohiko (1990): Nihon no Chikakettei Mechanism (The mechanism of land price determination in Japan) The
inheritance tax An inheritance tax is a tax paid by a person who inherits money or property of a person who has died, whereas an estate tax is a levy on the estate (money and property) of a person who has died. International tax law distinguishes between an e ...
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. Yet the appraisal of land for tax purposes used to be about one-half of the market value and the
debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...
was considered at face value during the bubble period. In order to evade inheritance tax, many individuals opt to borrow more money for themselves (since the interest rate was far lower), hence reducing exposure to inheritance tax. Furthermore, given that
capital gains Capital gain is an economic concept defined as the profit earned on the sale of an asset which has increased in value over the holding period. An asset may include tangible property, a car, a business, or intangible property such as shares. ...
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 companies to speculate on the asset price. The Japanese property tax stipulated that the statutory standard property tax stood at 1.4%. However, in terms of effective property tax, it is much lower than the published
statutory A statute is a formal written enactment of a legislative authority that governs the legal entities of a city, state, or country by way of consent. Typically, statutes command or prohibit something, or declare policy. Statutes are rules made by le ...
property tax. In the 1980s, the local government imposed a tax on the market price of land. Since the valuations did not rise in tandem with the actual rising market price, the effective property tax regressed over time. As a result, the Greater Tokyo area dropped to 0.06% of the market price. As the land price escalated much quicker than the tax rate, most Japanese considered land as an asset rather than for productive purposes. Strong expectations that land prices were likely to increase, coupled with minimal property taxes, meant it made more sense to
speculate In finance, speculation is the purchase of an asset (a commodity, goods, or real estate) with the hope that it will become more valuable shortly. (It can also refer to short sales in which the speculator hopes for a decline in value.) Many s ...
on the land price than to fully use the land for production purposes.


The land lease law

As provided under the Japan Civil Code, the rights of a
lessee A lease is a contractual arrangement calling for the user (referred to as the ''lessee'') to pay the owner (referred to as the ''lessor'') for the use of an asset. Property, buildings and vehicles are common assets that are leased. Industria ...
and
tenant Tenant may refer to: Real estate *Tenant, the holder of a leasehold estate in real estate *Tenant-in-chief, in feudal land law *Tenement (law), the holder of a legal interest in real estate *Tenant farmer *Anchor tenant, one of the larger stores ...
are protected under the Land Lease Law. This law can be traced back during
World War II World War II or the Second World War, often abbreviated as WWII or WW2, was a world war that lasted from 1939 to 1945. It involved the World War II by country, vast majority of the world's countries—including all of the great power ...
, whereby most heads of household were
conscripted Conscription (also called the draft in the United States) is the state-mandated enlistment of people in a national service, mainly a military service. Conscription dates back to antiquity and it continues in some countries to the present day und ...
for
military duty Military service is service by an individual or group in an army or other militia, air forces, and naval forces, whether as a chosen job (volunteer) or as a result of an involuntary draft (conscription). Some nations (e.g., Mexico) require ...
, leaving their families in danger of being thrown out off their leased land. For this reason, land
leasehold A leasehold estate is an ownership of a temporary right to hold land or property in which a lessee or a tenant holds rights of real property by some form of title from a lessor or landlord. Although a tenant does hold rights to real property, a l ...
contracts automatically renew unless the landlord provides concrete reasoning to object. 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". 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 A price is the (usually not negative) quantity of payment or compensation given by one party to another in return for goods or services. In some situations, the price of production has a different name. If the product is a "good" in the ...
. Hence, rents are actually kept "artificially low" 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.


Changes in bank behaviour

Traditionally, the 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 A capital market is a financial market in which long-term debt (over a year) or equity-backed securities are bought and sold, in contrast to a money market where short-term debt is bought and sold. Capital markets channel the wealth of savers ...
– leaving banks in a tight squeeze as lending costs grew with the shrinking
customer base The customer base is a group of customers who repeatedly purchase the goods or services of a business. These customers are a main source of revenue for a company. The customer base may be considered a business's target market, where customer behav ...
. 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 Security market is a component of the wider financial market where securities can be bought and sold between subjects of the economy, on the basis of demand and supply. Security markets encompasses stock markets, bond markets and derivatives mar ...
was lifted around 1980. 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. Soon, especially around 1987–1988, banks were even more apt to lend to individuals backed by properties. Evidently, even an ordinary
salaryman In Japan, a is a salaried worker. In Japanese popular culture, this is embodied by a white-collar worker who shows overriding loyalty and commitment to the corporation where he works. Salarymen are expected to work long hours, to put in addit ...
could easily borrow up to 100 million yen for any purpose, provided his house was used as
collateral Collateral may refer to: Business and finance * Collateral (finance), a borrower's pledge of specific property to a lender, to secure repayment of a loan * Marketing collateral, in marketing and sales Arts, entertainment, and media * ''Collate ...
. Consequently, this had an adverse impact on the whole Japanese asset bubble. Firstly, cheap and easily available loans reduced the funding costs for the purpose of speculation.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) Second, stock rises, coupled by low interests rates, reduced the capital costs and aided financing the
capital market A capital market is a financial market in which long-term debt (over a year) or equity-backed securities are bought and sold, in contrast to a money market where short-term debt is bought and sold. Capital markets channel the wealth of savers ...
(e.g.
convertible bonds In finance, a convertible bond or convertible note or convertible debt (or a convertible debenture if it has a maturity of greater than 10 years) is a type of bond that the holder can convert into a specified number of shares of common stock i ...
, bonds with
warrants Warrant may refer to: * Warrant (law), a form of specific authorization ** Arrest warrant, authorizing the arrest and detention of an individual ** Search warrant, a court order issued that authorizes law enforcement to conduct a search for eviden ...
, 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 Urban means "related to a city". In that sense, the term may refer to: * Urban area, geographical area distinct from rural areas * Urban culture, the culture of towns and cities Urban may also refer to: General * Urban (name), a list of people ...
land prices nationwide declined 1.7% from the peak. However, the impact was worse for land in the six
major cities The United Nations uses three definitions for what constitutes a city, as not all cities in all jurisdictions are classified using the same criteria. Cities may be defined as the cities proper, the extent of their urban area, or their metrop ...
, as the average land prices (commercial, residential, and industrial) dropped 15.5% from its peak.
Commercial Commercial may refer to: * a dose of advertising conveyed through media (such as - for example - radio or television) ** Radio advertisement ** Television advertisement * (adjective for:) commerce, a system of voluntary exchange of products and s ...
,
residential A residential area is a land used in which housing predominates, as opposed to industrial and commercial areas. Housing may vary significantly between, and through, residential areas. These include single-family housing, multi-family resi ...
and industrial land prices dropped 15.2%, 17.9%, and 13.1%, respectively. The entire asset price crisis was far worse, especially in the large business districts of
Tokyo Tokyo (; ja, 東京, , ), officially the Tokyo Metropolis ( ja, 東京都, label=none, ), is the capital and largest city of Japan. Formerly known as Edo, its metropolitan area () is the most populous in the world, with an estimated 37.46 ...
. By 2004, prime "A" properties in Tokyo's financial districts had slumped to less than 1 percent of their 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 Moscow ( , US chiefly ; rus, links=no, Москва, r=Moskva, p=mɐskˈva, a=Москва.ogg) is the capital and largest city of Russia. The city stands on the Moskva River in Central Russia, with a population estimated at 13.0 million ...
and other cities. However, since 2012, Tokyo is once again the world's most expensive city, followed by
Osaka is a designated city in the Kansai region of Honshu in Japan. It is the capital of and most populous city in Osaka Prefecture, and the third most populous city in Japan, following Special wards of Tokyo and Yokohama. With a population of ...
with
Moscow Moscow ( , US chiefly ; rus, links=no, Москва, r=Moskva, p=mɐskˈva, a=Москва.ogg) is the capital and largest city of Russia. The city stands on the Moskva River in Central Russia, with a population estimated at 13.0 million ...
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 Global means of or referring to a globe and may also refer to: Entertainment * ''Global'' (Paul van Dyk album), 2003 * ''Global'' (Bunji Garlin album), 2007 * ''Global'' (Humanoid album), 1989 * ''Global'' (Todd Rundgren album), 2015 * Bruno ...
.


Corruption

At the end of the bubble, it was revealed that corruption, which included bribery, insider trading, stock manipulation schemes and fraud, was pervasive in every aspect of Japanese society, from government officials to ordinary people, during the economic bubble. The Recruit scandal of 1988, whereby shares in a human resources firm were offered to politicians in return for favors, implicated the entire cabinet and revealed the close relationship between the government and the private sector. Nui Onoue, a former restaurant owner in Osaka, was convicted of fraud, and was responsible for the collapse of The Industrial Bank of Japan and Tōyō Shinyo Kinko Bank.


Household impact

The entire crisis also badly affected direct
consumption Consumption may refer to: *Resource consumption *Tuberculosis, an infectious disease, historically * Consumption (ecology), receipt of energy by consuming other organisms * Consumption (economics), the purchasing of newly produced goods for curren ...
and
investment Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing is ...
within Japan.Economic and Social Research Institute (2003):Trend of the Japanese economy and major topics in and after the 1970s 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 economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the value of currency over time, but sudden deflatio ...
in Japan. The asset price burst also badly affected
consumer confidence Consumer confidence is an economic indicator that measures the degree of optimism that consumers feel about the overall state of the economy and their personal financial situation. If the consumer has confidence in the immediate and near futur ...
since a sharp dip reduced household real
income Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be different across fields. Fo ...
.


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 The Nikkei 225, or , more commonly called the ''Nikkei'' or the ''Nikkei index'' (), is a stock market index for the Tokyo Stock Exchange (TSE). It has been calculated daily by the '' Nihon Keizai Shimbun'' (''The Nikkei'') newspaper since 19 ...
at the
Tokyo Stock Exchange The , abbreviated as Tosho () or TSE/TYO, is a stock exchange located in Tokyo, Japan. It is the third largest stock exchange in the world by aggregate market capitalization of its listed companies, and the largest in Asia. It had 2,292 listed ...
plunged from a height of 38,915 at the end of December 1989 to 14,309 at the end of August 1992. By 11 March 2003, it plunged to the post-bubble low of 7,862. As investments were increasingly directed out of the country, manufacturers were facing difficulties to uphold their
competitive advantage In business, a competitive advantage is an attribute that allows an organization to outperform its competitors. A competitive advantage may include access to natural resources, such as high-grade ores or a low-cost power source, highly skilled ...
since most manufacturing firms lost some degree of their technological edge. 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 Corporate governance is defined, described or delineated in diverse ways, depending on the writer's purpose. Writers focused on a disciplinary interest or context (such as accounting, finance, law, or management) often adopt narrow definitions ...
in Japanese companies, most Japanese corporations had an inclination to convince investors with their healthy balance sheet since most investors believe that such prices are likely bullish. 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. Many Japanese corporations were facing huge difficulties to reduce the debt ratio – resulting reluctance from the
private sector The private sector is the part of the economy, sometimes referred to as the citizen sector, which is owned by private groups, usually as a means of establishment for profit or non profit, rather than being owned by the government. Employment The ...
to increase investments. The government continued to provide support for failing banks and unprofitable businesses, making it impossible for more efficient firms to compete. 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. During the 1970s and 1980s, life-time employment schemes were widespread, but in a response to the recession that followed the bursting of the bubble, Japanese companies restructured their businesses, which included downsizing and outsourcing. Life-time employment schemes were modified and uncommon, and new college graduates failed to find stable jobs, resorting to unstable and poorly paid jobs.


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 Probability is the branch of mathematics concerning numerical descriptions of how likely an event is to occur, or how likely it is that a proposition is true. The probability of an event is a number between 0 and 1, where, roughly speaking, ...
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 Credit (from Latin verb ''credit'', meaning "one believes") is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately (thereby generating a debt) ...
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 Profit may refer to: Business and law * Profit (accounting), the difference between the purchase price and the costs of bringing to market * Profit (economics), normal profit and economic profit * Profit (real property), a nonpossessory inter ...
for the trader. The post-bubble crisis also claimed several victims such as Sanyo Securities Co.,
Hokkaido Takushoku Bank , literally ''Hokkaidō Exploitation Bank'', was a major commercial bank in Japan, founded in 1899 as a "Special Bank" to promote capitalism on the island of Hokkaidō. Its nickname was ; it was also known in the media and business world as . It was ...
, and Yamaichi Securities Co. in November 1997. By October 1998, the failure of the
Long-Term Credit Bank of Japan , abbreviated LTCB in English and in Japanese, was founded in 1952 under the direction of the Shigeru Yoshida government to provide long-term financing to various industries in Japan. Along with the Industrial Bank of Japan and the Nippon Kangy ...
as well as
Nippon Credit Bank is a Japanese commercial bank that offers service in 19 branches in Japan and in 2 overseas representative offices (as of July 2012). History Aozora Bank is the successor of the Nippon Credit Bank (NCB), which was founded in 1957 as the Nippo ...
in December the same year worsened the
financial system A financial system is a system that allows the exchange of funds between financial market participants such as lenders, investors, and borrowers. Financial systems operate at national and global levels. Financial institutions consist of complex, c ...
unrest, drastically deteriorating
consumer A consumer is a person or a group who intends to order, or uses purchased goods, products, or services primarily for personal, social, family, household and similar needs, who is not directly related to entrepreneurial or business activities. ...
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.


The lost decade

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

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.


Media

The Japanese asset price bubble is spotlighted in the
NHK , also known as NHK, is a Japanese public broadcaster. NHK, which has always been known by this romanized initialism in Japanese, is a statutory corporation funded by viewers' payments of a television license fee. NHK operates two terrestr ...
's series ''A Portrait of Postwar Japan'' (2015), Episode 2: "The Bubble and the Lost Decades". The documentary creators obtained information from interviews with more than one hundred key figures of the bubble. The video game ''
Yakuza 0 ''Yakuza 0'' is an action-adventure game developed by Ryu Ga Gotoku Studio and published by Sega. It is the sixth main entry in the '' Yakuza series'' and a prequel to the original game. It was released for PlayStation 3 and PlayStation 4 in J ...
'' developed by
Sega is a Japanese multinational video game and entertainment company headquartered in Shinagawa, Tokyo. Its international branches, Sega of America and Sega Europe, are headquartered in Irvine, California and London, respectively. Its division ...
takes place in late 1988 during the Japanese asset price bubble and references the bubble.


Notes


References

* Saxonhouse, Gary and Stern, Robert (Eds) (2004) ''Japan's Lost Decade: Origins, Consequences and Prospects for Recovery (World Economy Special Issues)'', Wiley-Blackwell, * Wood, Christopher (2005) ''The Bubble Economy: Japan's Extraordinary Speculative Boom of the '80s and the Dramatic Bust of the '90s'', Solstice Publishing, * Daniell, Thomas (2008) ''After the Crash: Architecture in Post-Bubble Japan'', Princeton Architectural Press, * Klarman, Seth A. (1991) ''Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor'', HarperCollins,


External links


Core Economics
animated Real Estate Rollercoaster Ride * Shigenori Shiratsuka:   * Allan I. MENDELOWITZ

RIETI speech summary, June 12, 2003 *
Deloitte Report see page 10
* Status Ireland

(Japan Urban Land Index 1964 - 2007) {{Financial crises 1986 in economics 1987 in economics 1988 in economics 1989 in economics 1990 in economics 1991 in economics Asset price bubble Asset price bubble Asset price bubble Asset price bubble Asset price bubble Asset price bubble Asset price bubble Asset price bubble Economic bubbles Asset price bubble Asset price bubble Shōwa period Real estate bubbles Stock market crashes de:Kakaku Hakai