Japanese asset price bubble

• 1. Introduction

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  On the 29th of December 1989, the Nikkei stock index hit 38,957.44, a number that represented the peak of one of the most extreme economic distortions any developed nation had ever seen. At that same moment, the land beneath a single imperial palace in central Tokyo was estimated to be worth more than all the real estate in the state of California. These numbers were not projections or wishes. They were real valuations attached to real assets. And within just three years, it would all begin to collapse.

  The Japanese asset price bubble ran from 1986 to 1991, a period when land and stock prices swelled to heights no sober model could justify. The forces that created it were not mysterious. They were a combination of international currency agreements, domestic tax law, aggressive bank lending, and a central bank that was slow to act when it should have moved quickly. How those ingredients combined to produce a boom and then a prolonged national crisis is a story that touches every corner of Japanese society.

  The questions that demand answers are these: who made the decisions that let the bubble inflate? Why did land in Tokyo become the most expensive on earth? And what happened to a country whose economy had seemed unstoppable when the price of everything fell at once?

• 2. The Plaza Accord and the Yen

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  On the 22nd of September 1985, Japan, the United Kingdom, France, West Germany, and the United States signed the Plaza Accord at a New York hotel. The agreement was designed to reduce trade imbalances, particularly the large surplus Japan was running against the United States. Japan's exports were priced competitively because the yen was weak against the dollar. The accord set in motion a deliberate effort to change that.

  Central banks in the signatory countries began selling US dollars, which drove up demand for the yen. In 1985, the exchange rate stood at 238 yen per dollar. By 1986, it had dropped to 165 yen per dollar as the yen appreciated. Speculators accelerated the move by buying yen and selling dollars, pushing the currency further than the governments had intended. The yen reached 128.25 yen per dollar by December 1987.

  For Japan, whose economy was built on export surpluses, this was damaging. The GDP growth rate fell from 5.2% in 1985 to 3.3% in 1986. Economists called the resulting downturn the endaka recession, a term that would be used again whenever the yen surged and the export engine stalled. Japanese companies had to sell their goods in the United States at higher prices than before just to break even.

  The government responded by shifting focus from exports to domestic demand. The Bank of Japan slashed the official discount rate from 5.0% in January 1986 to 2.5% by February 1987. Cheap money was meant to revive the domestic economy. Instead, it poured into land and stocks. The Plaza Accord, which failed to permanently equalize the trade balance between Japan and the United States, had set the conditions for something far more destabilizing than a trade dispute.

• 3. Land Prices and the Six Major Cities

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  By 1985, commercial land in Tokyo was already running short of supply. The average price per square meter in Tokyo commercial districts stood at 1,894,000 yen in 1985. One year later, that same square meter cost 4,211,000 yen, a jump of 122% in a single year. Residential land in Tokyo rose 45% in the same period. These were not gradual increases. They were vertical climbs.

  The Japan Real Estate Institute identified six cities where the bubble hit hardest: Tokyo, Yokohama, Nagoya, Kyoto, Osaka, and Kobe. By 1991, commercial land prices in those six cities had risen 302.9% compared to 1985. Residential and industrial land rose 180.5% and 162.0%, respectively. Nationwide, the gains were smaller but still extraordinary, with commercial land up 80.9% and residential land up 51.1%.

  As Tokyo prices climbed past what investors could justify, money moved outward. By 1987, buyers flooded into the Greater Tokyo Area, preferring cities in Southern Kanto. In that year, commercial land in Yokohama averaged 1,279,000 yen per square meter and in Chiba averaged 1,230,000 yen per square meter. Cities in Northern Kanto, farther from Tokyo, remained much cheaper; Mito's commercial land averaged just 153,000 yen per square meter in 1986.

  The peak of the Ginza district, the most expensive land in Japan, reached 30,000,000 yen per square meter in 1989. The first signs that non-prime Tokyo land had topped out appeared in 1988, when some wards began to see modest price declines. But the broader national market had not registered this warning. In Osaka, commercial land rose 37% and residential land rose 41% that same year, as if Tokyo's plateau were happening in a different country.

• 4. Banks, Taxes, and the Architecture of Speculation

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  A salaryman in late 1980s Japan could walk into a bank and borrow up to 100 million yen against the value of his house. This was not unusual. It was policy. Banks had been aggressively promoting property-backed loans to smaller firms since 1983, years before the formal monetary easing began. By 1987-1988, that lending had extended to ordinary individuals, and the collateral was always real estate.

  The tax system made land speculation more attractive than productive use. The inheritance tax was reported at 75% of market price for estates over 500 million yen until 1988. However, land was appraised at only about half its market value for tax purposes, and debt was counted at face value. Wealthy individuals could borrow at low rates, reducing their taxable estate. Capital gains on land were not taxed until sale, and interest payments on real estate investments were deductible. The statutory property tax rate was 1.4%, but effective rates in the Greater Tokyo Area had fallen to as low as 0.06% of market price by the height of the bubble.

  The Land Lease Law created a separate distortion. Tenants in Japan held strong legal protections tracing back to the Second World War, when conscripted heads of household feared their families would be evicted. Lease contracts renewed automatically, and courts could set rents at fair and reasonable levels, which in practice meant landlords could not raise rent to match market prices. Many landlords responded by leaving their land empty, waiting for the capital gain rather than accepting artificially low rental income.

  Cross ownership of corporate shares had risen from 39% in 1950 to 67% by the 1980s, while corporate stock trading rose from 19% to 39% of total trading volume. This reduced the number of shares available for daily trading and made prices easier to manipulate. The direction of stock prices was largely determined by land prices, since rising land inflated corporate balance sheets and pushed share prices higher. Investors speculated on stocks because land prices were rising, and they speculated on land because borrowing was cheap. Each loop reinforced the other.

• 5. The Bank of Japan's Slow Turn

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  At the end of August 1987, the Bank of Japan signaled that it might tighten monetary policy. Then Black Monday hit the New York Stock Exchange on the 19th of October 1987, and the BOJ stood down. Japan's economy had already entered expansion in the second half of 1987, but the central bank held the official discount rate at 2.5% without change from the 24th of February 1987 until the 30th of May 1989. That was more than two years of unchanged ultra-low rates while asset prices climbed.

  The BOJ's delay had defenders and critics. Some early researchers blamed the central bank's inaction on caution around economic uncertainty. Later research argued that the BOJ's reluctance persisted even as the domestic expansion made tightening appropriate. Economist Richard Werner argued that external pressures, including the Plaza Accord and Ministry of Finance guidance on cutting the discount rate, were insufficient to explain the BOJ's choices. The money supply had exceeded 10% growth by April-June 1987 and reached about 12% annually by early 1988.

  By the time the BOJ moved, beginning with a rate hike to 3.25% on the 30th of May 1989, the bubble had been inflating for years. The rate climbed further to 4.25% by the 25th of December 1989, and then to 6.00% on the 30th of August 1990, a move partly triggered by the Gulf Crisis. By August 1990, the Nikkei had already fallen to half its peak value. The fifth and final round of monetary tightening came on the same date the stock market was registering that collapse.

  Land prices continued to rise in most parts of Japan even as the BOJ raised rates through 1989 and into 1990. The lag between monetary policy and real asset prices meant the tools were always arriving after the fact. By late 1991, urban land prices across Japan began falling. The official declaration that the bubble had burst came in early 1992.

• 6. The Corruption Behind the Boom

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  When the bubble ended, a different kind of accounting began. Investigators found that fraud, bribery, insider trading, and stock manipulation had been pervasive across Japanese society during the bubble years, reaching from government officials to ordinary citizens.

  The Recruit scandal of 1988 involved shares in a human resources firm being offered to politicians before the company's public listing, in exchange for political favors. The scandal implicated the entire cabinet and exposed the depth of the relationship between government and the private sector.

  Nui Onoue, a former restaurant owner from Osaka, was convicted of fraud. Her activities were linked to the collapse of the Industrial Bank of Japan and Toyo Shinyo Kinko Bank. The scale of individual bad actors in the financial system was not incidental. It reflected how thoroughly the bubble's logic had penetrated daily decision-making at every level.

• 7. Collapse and the Lost Decades

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  From a peak of 38,915 at the end of December 1989, the Nikkei 225 fell to 14,309 by the end of August 1992. By the 11th of March 2003, it had reached a post-bubble low of 7,862. By 2004, prime office properties in Tokyo's financial districts had slumped to less than 1% of their peak value. Tokyo residential homes were worth less than a tenth of what they had fetched at the top, yet still ranked among the most expensive in the world.

  The losses were staggering. Tens of trillions of dollars of value were erased by the combined collapse of the Tokyo stock and real estate markets. Nationwide urban land prices declined 1.7% from the peak by 1992, but the six major cities suffered a 15.5% average decline in that same year alone.

  Financial institutions began to accumulate non-performing loans at a scale that crippled the system. Banks were still making loans with low probability of repayment as late as 1997. In November 1997, Sanyo Securities, Hokkaido Takushoku Bank, and Yamaichi Securities all collapsed. In October 1998, the Long-Term Credit Bank of Japan failed, followed by Nippon Credit Bank in December the same year. The government injected 9.3 trillion yen in public funds into major banks in March 1998 and March 1999.

  The decade after 1991 became known in Japan as the Lost Decade. It eventually extended into a second decade, as Japanese GDP in 2017 was only 2.6% higher than it had been in 1997, representing an annualized growth rate of just 0.13%. Life-time employment, which had been widespread during the 1970s and 1980s, was restructured away. New college graduates lost access to stable jobs. The term "zombie company" entered the business vocabulary to describe firms that could not cover their debt servicing costs from current profits but were kept alive by government-backed credit.

  The central bank imposed a zero-interest-rate policy in the late 1990s, cutting the nominal rate from 2% to 0.5% in 1995, then to 0.32% in 1998 and 0.05% in 1999. When GDP recovered to 3% in 2000, the central bank raised rates to 1%, only to watch growth fall back to 0.5% in 2001. Quantitative easing followed in 2001. Japan's average nationwide land prices did not begin rising year-over-year again until 2018, when they posted a 0.1% increase over 2017 levels.