Japanese asset price bubble

• 1. Plaza Accord And Yen Appreciation

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  On the 22nd of September 1985, five nations signed the Plaza Accord in New York. Japan, the United Kingdom, France, West Germany, and the United States agreed to intervene in currency markets. The goal was to reduce trade imbalances by weakening the US dollar against other currencies. Before this agreement, one US dollar traded for approximately 238 Japanese yen. Within a year, that rate dropped to 165 yen per dollar as speculators bought yen aggressively. This rapid appreciation of the Japanese yen caused an export recession known as endaka fukyō. Japanese companies struggled to sell goods abroad because their products became much more expensive for American buyers. Export volumes nearly halved from their peak in 1986 to levels seen in 1992. The Bank of Japan responded by cutting interest rates to stimulate domestic demand. They slashed the official discount rate from 5.0% down to 4.5% on the 30th of January 1986. A second cut followed on the 10th of March 1986, bringing the rate to 4.0%. By the 23rd of February 1987, the rate reached a historic low of 2.5%. These cuts were often coordinated with foreign central banks under agreements like the Louvre Accord. Most subsequent rate cuts were motivated by international policy rather than domestic economic stability. Money growth accelerated beyond control during this period. In 1985 and 1986, money growth hovered around 8 percent before rising above 10 percent by late 1987.

• 2. Monetary Easing And Credit Expansion

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  The Bank of Japan maintained the official discount rate at 2.5% for over two years between May 1989 and early 1990. This prolonged period of cheap credit fueled massive borrowing activity across Japanese corporations. Banks began lending aggressively to smaller firms backed by property collateral. Ordinary salarymen could borrow up to 100 million yen using their homes as security. Corporate funding grew rapidly from 1988 onward, reaching nearly 14 percent year-on-year growth in 1989. The money supply continued expanding even after monetary tightening measures began. Growth rates exceeded double digits until the fourth quarter of 1990. Financial deregulation allowed companies to raise funds directly from capital markets instead of relying solely on bank loans. This shift forced banks to compete harder for borrowers. They started offering loans to individuals backed by real estate assets. Stock prices rose alongside land values, reducing capital costs for financing convertible bonds and warrants. The combination of low interest rates and rising asset prices created a self-reinforcing cycle. Corporations used inflated balance sheets to secure more loans. These loans were then used to purchase more land or stocks. The system became fragile because it relied entirely on continuous price appreciation.

• 3. Speculative Frenzy In Tokyo Real Estate

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  Land prices in Tokyo commercial districts jumped approximately 122% between 1985 and 1986. Average prices per square meter reached 4,211,000 yen by 1986. By 1987, residential land in Tokyo cost 890,000 yen per square meter while commercial land hit 6,493,000 yen. Prime areas like Ginza peaked at 30 million yen per square meter. Investors flocked to surrounding prefectures including Kanagawa, Saitama, and Chiba. Commercial land in Yokohama averaged 1,279,000 yen per square meter compared to just 153,000 yen in Mito. The disparity reflected how proximity to Tokyo drove speculation. Land supply within the metropolis was scarce so buyers looked outward. Tax distortions encouraged holding land rather than developing it. Inheritance taxes stood at 75 percent of market value for properties over 500 million yen until 1988. Capital gains were not taxed until sale occurred. Interest payments on loans could be deducted from taxable income. These rules made speculation more profitable than production. Many landlords left land vacant waiting for prices to rise further. The Greater Tokyo Area effective property tax rate dropped to 0.06% of market price. This created an environment where holding assets made more sense than using them productively.

• 4. The Nikkei Stock Market Peak

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  The Nikkei 225 index reached a record high of 38,957.44 on the 29th of December 1989. Stock trading volumes accounted for by corporations rose from 19% to 39% during the 1980s. Cross ownership increased from 39% in 1950 to 67%. This reduced available shares for public trading and made manipulation easier. Corporate balance sheets relied heavily on inflated asset values. When land prices began falling in late 1989, stock markets followed sharply downward. The index slid from 38,921 in January 1990 to 21,902 by December 1990. That represented a loss of over 43 percent within a single year. By the 19th of August 1992, the Nikkei opened as low as 14,338. Stock prices officially collapsed by the end of 1990. Some researchers concluded unusual stock prices resulted directly from rising land values since corporate net assets increased accordingly. As long as asset prices strengthened, investors remained attracted to speculation. However, this exposed weaknesses in Japanese corporate governance. Tightening monetary policy in 1989 affected stock prices immediately. Lending costs increased drastically while land price growth slowed significantly.

• 5. Corruption And The Recruit Scandal

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  The Recruit scandal of 1988 implicated the entire cabinet through insider trading schemes. Shares in a human resources firm were offered to politicians in return for favors. Nui Onoue, a former restaurant owner in Osaka, was convicted of fraud related to bank collapses. Corruption included bribery and stock manipulation across every aspect of society. Government officials and ordinary people participated in these schemes. The scandal revealed close relationships between private sector executives and public office holders. These connections allowed insiders to profit from upcoming policy changes before they became public knowledge. The government continued providing support for failing banks and unprofitable businesses throughout the crisis period. This made it impossible for more efficient firms to compete fairly. Sham loan restructurings kept insolvent borrowers alive artificially. The term zombie company described firms unable to cover debt servicing costs from current profits over extended periods. Zombie companies reduced profits for competitive firms and depressed job creation. They also discouraged new investments into the economy. Life-time employment schemes widespread during the 1970s and 1980s were modified after the recession hit. New college graduates failed to find stable jobs resorting instead to unstable and poorly paid positions.

• 6. Banking Sector Collapse And Zombie Firms

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  Several major financial institutions collapsed between 1997 and 1998. Sanyo Securities Co., Hokkaido Takushoku Bank, and Yamaichi Securities Co. all failed in November 1997. The Long-Term Credit Bank of Japan and Nippon Credit Bank went under by October 1998 and December 1998 respectively. Loan officers struggled to find profitable investment opportunities even as late as 1997. Some deposited block investment cash as ordinary deposits in competing banks just to avoid losses. Correcting credit problems became increasingly difficult when governments began subsidizing failing entities. A carry trade developed where money was borrowed cheaply in Japan then invested elsewhere for higher returns. The government injected a total of 9.3 trillion yen in public funds into major banks during March 1998 and March 1999. These injections aimed to stabilize the financial system but created moral hazard issues. Banks continued making loans with low probability of repayment years after the bubble burst. Corporate balance sheets deteriorated rapidly once asset prices tumbled. Increasing liabilities on a long-term basis projected bad balance sheets to investors. Many Japanese corporations faced huge difficulties reducing debt ratios resulting in reluctance from private sector to increase investments.

• 7. The Lost Decades Of Stagnation

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  Japanese GDP in 2017 was only 2.6% higher than it had been in 1997. This period became known as the Lost Decade or later the lost 20 years due to gradual effects of the asset bubble collapse. Urban land prices nationwide declined 1.7% from their peak by 1992. Average land prices in six major cities dropped 15.5% from peaks. Commercial, residential, and industrial land prices fell 15.2%, 17.9%, and 13.1% respectively. Prime A properties in Tokyo's financial districts slumped to less than 1 percent of their peak value by 2004. Residential homes in Tokyo reached less than one-tenth of their peak values yet remained listed among world's most expensive until late 2000s when Moscow surpassed them. Tens of trillions of dollars worth of value disappeared with combined collapse of stock and real estate markets. Property prices began rising again in 2007 but fell once more in late 2008 due to global financial crisis. The Bank of Japan imposed zero-interest policy starting in 1999 reducing nominal rates close to 0%. Quantitative easing expanded maximum deposit amounts in central bank while lowering call rates between banks nearly to zero. Economy recovered slowly after 2001 before quantitative easing stopped in 2006. Consumer confidence remained at lowest levels from uncertainty about future economic prospects.