Japan’s 1986-1991 Real Estate Bubble

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In 1985, Japan’s economy was booming unprecedentedly, and “buy the United States” and “Japan can say no” prevailed. Stimulated by low-interest rates, excess liquidity, financial liberalization, and international capital inflows, Japanese real estate created an unprecedented bubble from 1986 to 1990. The land price in Tokyo alone is equivalent to the land price in the United States. Then, under the pressure of rising interest rates, controlling real estate loans and land transactions, and capital outflows, the real estate bubble collapsed, followed by a long decline in housing prices, and the Japanese economy fell into a loss for two decades.

Formation: Economic boom, Plaza Accord, yen appreciation, low-interest rates

(1) In the early 1980s, the Japanese economy experienced unprecedented prosperity

Since the 1960s, Japan has maintained rapid economic growth. With the Tokyo Olympics in 1964 and the Osaka World Expo in 1966, Japan showed the world its image as a nation revived from the shadow of defeat.

In the early 1980s, Japan overtook Italy, France, the United Kingdom, and Germany to become the first power in Asia and the second largest power in the world after the United States. Products made in Japan can be found all over the world, and Japanese companies invest and acquire heavily around the world. Japan’s a trade and manufacturing industry is close to that of the United States, and it surpasses the United States in fields such as electronics, automobiles, steel, and shipbuilding. Japan’s economy is half the size of the United States, and its foreign exchange reserves exceed US$400 billion, accounting for 50% of the world’s foreign exchange reserves. In 1985, Japan overtook the United States as the world’s largest creditor nation. American banks, supermarkets, and even Hollywood’s Columbia Pictures and New York’s iconic Rockefeller Building have all become Japanese possessions.

The Japanese economy has entered a period of dazzling heyday, and behind the unprecedented prosperity, a crisis is brewing.

(2) Plaza Accord: Conspiracy? Yang conspiracy?

In 1978, the second oil crisis broke out. Due to the sharp rise in energy prices, severe inflation has occurred in the United States. In the summer of 1979, Paul Volcker became chairman of the Federal Reserve. To control inflation, he raised the federal funds rate three times in a row and implemented a tightening monetary policy.

This policy raised the nominal interest rate of the US federal funds to around 20%, which attracted a large amount of overseas capital into the US and led to a sharp appreciation of the US dollar. From the end of 1979 to the end of 1984, the exchange rate of the dollar rose by nearly 60%, and the exchange rate of the dollar against major countries even exceeded the level before the collapse of the Bretton Woods system.

The strong dollar has led to a substantial increase in the US foreign trade deficit. To improve the imbalance of international payments, the United States hopes to increase the export competitiveness of its products through the devaluation of the dollar.

In September 1985, the finance ministers and central bank governors of five developed countries, including the United States, Japan, the Federal Republic of Germany, France, and the United Kingdom, held a meeting at the Plaza Hotel in New York and decided to jointly intervene in the foreign exchange market by the governments of the five countries, so that the US dollar would be more stable against major currencies. It fell in an orderly manner to resolve the huge US trade deficit, known in history as the “Plaza Accord”.

After the signing of the “Plaza Accord”, the five countries began to sell dollars in the foreign exchange market, which led to a selling frenzy of market investors. As a result, the dollar continued to depreciate sharply, and the exchange rates of the world’s major currencies against the US dollar rose to vary degrees. Among them, the appreciation of the yen is the largest, reaching 86.1% in three years.

This is not the first time the United States has intervened in the foreign exchange market. In December 1971, Japan signed the Smithsonian Agreement with the United States. According to the agreement, the exchange rate of the yen against the US dollar rose from 1 US dollar to 360 yen to 1 US dollar to 308 yen, an increase of 18%. This round of exchange rate reform led to the rise of land prices in Japan in 1973, but it only lasted for one year due to the impact of the oil crisis.

The sharp appreciation of the yen has improved the status of the yen in the international monetary system, promoted a substantial increase in Japan’s foreign investment, and provided opportunities for Japanese companies to expand overseas. But at the same time, the Japanese economy has also planted a bubble bomb.

(3) Low-interest rates and deregulation of finance

Concerned that the appreciation of the yen will increase the cost and price of Japanese products, the Japanese government has formulated economic expansion policies to boost domestic demand and eased domestic financial controls. From January 1986 to February 1987, the Bank of Japan cut interest rates five times in a row, reducing the central bank discount rate from 5% to 2.5%, which was not only the lowest in Japanese history but also the lowest in major countries in the world at that time. Driven by monetary easing, the year-on-year growth rate of M2 in Japan increased from 8% to over 12% between 1985 and 1990, but the year-on-year CPI growth rate was not high, which gave the Bank of Japan an illusion.

In 1986, Japan further liberalized its financial market, and companies can issue a variety of corporate bonds for financing. According to statistics, the financing amount of Japanese companies increased by 5.5 times between 1985 and 1989.

Against the backdrop of low-interest rates and excess liquidity, a lot of money has flowed into the stock and real estate markets. People have borrowed from banks to invest in lucrative stocks and real estate. As a result, stock prices skyrocketed and land prices skyrocketed. But at that time, Japan had already completed its urbanization construction, and the domestic urbanization rate exceeded 90%. A giant bubble is being born.


Mania: Banks fuel the flames, international hot money flows in, and speculation prevails

(1) Banks actively grant loans

In the 1980s, the Bank of Japan began to implement the reform of bank capital management. To promote the internationalization of banks, the Japanese government decided to implement double standards: domestic businesses can follow the domestic standard of 4%, and banks with overseas branches must implement the international standard of 8%. Under this requirement, in addition to constantly replenishing capital, the Bank of Japan has to adjust the bank’s asset structure.

Real estate mortgages have lower risk weights than general corporate loans. This means that banks make the same amount of loans as real estate mortgages with half the capital. So Japanese commercial banks have put funds into the field of housing loans.

The huge bubble in the real estate industry has stimulated the growth of mortgage loans by financial institutions, and banks have invested heavily in real estate, issuing large numbers of mortgage loans, and encouraging landholders to speculate. During the period of the housing bubble, lending to real estate grew faster than the money supply. The Bank of Japan’s “Monthly Economic Statistics Report” shows that from 1984 to 1989, the average annual growth rate of banks’ mortgage loans was 19.9%, far exceeding the 9.2% loan growth rate during the same period. According to the “Statistical Quarterly Report on Corporate Enterprises” of the Ministry of Finance, most of the external funds required by Japanese companies to purchase land during the same period came from bank loans.

During the period of rising house prices, the banking industry underestimated the risks involved in real estate-backed loans and even issued unsecured credit loans. Some senior bank executives use the scale of lending as an employee evaluation indicator. As a result, the proportion of real estate mortgage loans in the total loans of Japanese banks has increased year by year. With the rise of land prices and stock prices, borrowers’ mortgage ability has increased and off-book assets have increased. This part of the enterprises that raised funds by using real estate mortgage loans used most of their funds to purchase land, stocks, etc. that may appreciate in the future. , the cycle continues to push up housing prices.

From 1986-to 1991, the bank’s real estate mortgage loan balance doubled. From 1984 to 1991, the urban land price index in Japan rose by 66.1%, while the consumer price index only rose by 12.6% in the same period.

(2) Influx of international hot money

During the same period, the influx of international hot money accelerated the expansion of Japan’s real estate bubble. After the Plaza Accord was signed, the yen maintained an annual appreciation level of 5%, which means that as long as the international capital holds yen assets, it can obtain exchange gains of more than 5% through exchange rate changes.

Sharp international capital quickly made a comeback, making a big splash in Japan’s stock and real estate markets. The inflow of cheap international capital intensified the pressure on the appreciation of the yen, leading to a rapid rise in stock prices and housing prices, which attracted more international capital to speculate in Japan, and the bubble became bigger and bigger.

(3) Currency-driven, speculation prevails

As a lot of money poured into the real estate industry, Japan’s land prices began to skyrocket. According to the survey statistics released by the Japan Land Agency, in 1985, Tokyo’s commercial land price index was 120.1, and in 1988 it soared to 334.2, an increase of nearly 2 times in just three years.

In 1990, the land price index in the six major urban centers of Tokyo, Osaka, Nagoya, Kyoto, Yokohama, and Kobe rose by about 90% compared with 1985. At that time, the land price in Tokyo alone was equivalent to the land price in the entire United States, creating an unprecedented real estate bubble in the world.

However, Japan’s nominal GDP growth was only around 5% per year during the same period. The rapid rise in land prices has seriously affected the development of the real industry. The high price of construction land makes it difficult for many factories and enterprises to expand their scale; the high land price also brings serious obstacles to the government’s urban construction; the high housing price makes it impossible for ordinary Japanese to buy their own housing…Japan The bubble economy is farther and farther away from the real economy.

2.3 Collapse: The real estate bubble collapsed and Japan’s financial war was defeated

Under the pressure of the double bubbles in the stock market and the housing market, the Japanese government chose to actively squeeze the bubble, took very severe administrative measures to adjust tax and monetary policies, and eventually the stock market and housing market bubbles burst after another.

(1) Tight monetary policy

As inflationary pressure began to appear in 1989 (3%-4%), and stock prices and house prices accelerated, the Bank of Japan raised interest rates five times in a row since 1989, and the interest rate of commercial banks’ borrowing from the central bank increased from February 1987. 2.5% rose to 6% in August 1990. At the same time, the growth rate of the money supply has fallen sharply.

In the beginning, the Japanese government did not realize that popping the bubble would cause such great harm. If it had been known in advance, the policy might have changed.

(2) Strict control over real estate loans and land transactions

In July 1987, the Japanese Ministry of Finance convened relevant financial institutions to hold hearings to understand the activities of financial institutions in the real estate market. Since then, the Ministry of Finance has issued administrative guidance requiring financial institutions to strictly control loan projects on land, with the specific requirement that “the growth rate of real estate loans cannot exceed the growth rate of overall loans”. Affected by this, the growth rate of real estate loans of Japanese financial institutions dropped rapidly, from 36.6% in June 1987 to 10.2 % in March 1988. By 1991, Japanese commercial banks had effectively stopped lending to the real estate industry.


(3) Adjustment of land income tax

Before the October 1987 adjustment to the tax system, ownership of land for less than 10 years was considered a “short-term holding”, while more than 10 years was considered a “long-term holding”, and after the tax adjustment, holdings for less than 2 years were considered It is an “ultra-short-term holding” and is subject to key supervision.

(4) The stock market bubble burst first

The sudden turn in Japan’s monetary policy was the first to burst the bubble in the stock market. January 12, 1990, was the darkest day ever for the Japanese stock market. On the same day, the Nikkei tumbled, and the Japanese stock market plummeted 70 %. People vaguely remember that just two weeks ago, on December 31, 1989, the Nikkei index reached a brilliant high of 38,915 points. However, with the new year of 1990 as a turning point, the Japanese stock market fell into a 20- year bear market.

In September 1990, the Nikkei stock market lost an average of 44%, and related stocks fell by an average of 55%. The sharp fall in Japanese stock prices has caused huge losses for almost all banks, corporations, and securities firms.

(5) The huge real estate bubble collapsed

The bankruptcy of the company caused a large amount of real estate owned by it to flood into the market, and the real estate market suddenly experienced an oversupply and a downward trend in house prices.

At the same time, as the yen arbitrage space is shrinking, international capital began to flee. In 1991, the Japanese real estate market began to collapse, and the huge real estate bubble burst from Tokyo and quickly spread throughout Japan. Land and houses simply cannot be sold, the buildings that have been completed one after another have no occupants, vacant houses are everywhere, and real estate prices have plummeted.

In 1992, the Japanese government introduced the “land value tax” policy, which stipulates that all landholders must pay a certain percentage of tax every year. Owners who had hoarded a lot of land during the real estate boom sold their land, and the Japanese real estate market immediately entered an ice age of “oversupply”.

The superposition of several factors has accelerated the overall collapse of the Japanese real estate economy. The slump in real estate prices has led to the bankruptcy of a large number of real estate companies and related companies. In 1993, the total liabilities of Japanese real estate bankruptcy companies reached 3 trillion yen.

Immediately after, non-bank financial institutions, the protagonists of land speculation, went bankrupt one after another due to their large number of bad debts. As a result, the banks that fund these institutions also have huge amounts of bad debt. That year, Japan’s 21 major banks announced bad debts of $110 billion, one-third of which were related to real estate.

In July 1991, Fuji Bank’s false savings certificate incident was exposed. Immediately afterward, Tokai Bank and Kyowa Saitama Bank were also revealed to have the same problem. A large number of bank scandals have been exposed continuously, causing a serious credit crisis in the Japanese banking industry. A few years later, several major banks collapsed one after another.

The collapse of the “land myth”, the bankruptcy of small and medium-sized banks, the exposure of securities scandals… The successive blows have made the Japanese people lose confidence in the capital market. Since then, affected by the Asian financial crisis and the subprime mortgage crisis, the Japanese real estate market has never been able to regain its glory.

(6) The long descent

Land prices in Japan peaked in 1991 and then began a long decline. Data from the Bureau of Statistics of Japan shows that land prices in Japan have continued to decline since 1992. As of 2015, the price of residential land in six major cities has fallen by 65%, and all cities have fallen by 53%.

The decline in large cities was significantly larger than that in small and medium-sized cities. Statistics from the Japan Bureau of Statistics show that between 1992 and 2000, the price of residential land in Japan’s six major cities fell by 55%, while the price of small and medium-sized cities (cities outside the six major cities) fell by only 19.4%.

In 2008, according to the survey data of Japan’s Ministry of Land, Infrastructure, Transport, and Tourism, Japan’s housing vacancy rate reached 13.1%, higher than 9.4% in 1988 and the highest level so far. Despite 20 years of difficult adjustments, Japan’s housing market remains weak.

Impact: The Lost Twenty Years

After Japan’s real estate bubble burst, the economy fell into the lost two decades and long-term deflation, residents’ wealth shrank sharply, corporate balance sheets deteriorated, bank non-performing ratios rose, and government debts mounted. Japan’s political influence declined and its superpower dream was shattered.

(1) Reasons for the large adjustment range and long duration of the bubble in 1991: the right-age homebuyers and the inflection point of economic growth

Japan’s housing price bubbles in 1974 and 1991 were evenly matched, so why was 1991 a big inflection point?

If we compare the formation and bursting of the real estate bubble in Japan around 1974 and around 1991, we can find that the first adjustment around 1974 was small and the resilience was strong. Maintaining a high level, etc. provides fundamental support.

From 1974 to 1985, although Japan bid farewell to high-speed growth, it still achieved an average annual growth rate of about 3.5%. In 1970, the urbanization rate of Japan was 72%, and there is still some room for it. After reaching a peak in 1974, the number of 20- to 50-year-old homebuyers did not turn downward, remaining at a high level from 1974 to 1991.

However, the second adjustment around 1991 was large and lasted for a long time, due to the long-term low-speed economic growth, the near-finishing of urbanization, and the sharp and rapid decline in the housing-buying population of the right age. After 1991, Japan’s economy has grown by only about 1% per year on average, with a serious aging population and a substantial increase in the population dependency ratio. In 1990, the urbanization rate in Japan was as high as 77.4%. After 1991, the number of 20-50-year-old homebuyers dropped sharply and rapidly.

(2) Trapped in a lost two decades and prolonged deflation

After the real estate bubble burst in 1991, Japan’s economic growth rate and inflation rate both dropped, falling into the high-income trap. From 1992 to 2014, Japan’s GDP growth rate averaged 0.8%, and the average CPI growth rate was 0.2%. In the ten years before the crisis, Japan’s average GDP growth rate was 4.6%, and the CPI average was 1.9%.

It is worth noting that such “achievements” were only achieved under the great stimulus of the government. Counter-cyclical regulation has led to a substantial increase in the Japanese government’s debt ratio and a substantial expansion of the central bank’s balance sheet. The yield on Japan’s 10-year government bond fell to negative territory, reflecting the still gloomy outlook for the future.

(3) Shrinking of private wealth

Gu Charming mentioned in his book “The Great Recession” that the loss of wealth brought to Japan by the decline in real estate and stock prices reached 1,500 trillion yen, which is equivalent to the sum of personal financial assets in Japan. This figure is also equivalent to Japan’s 3-year GDP sum. As can be seen from the chart below, the proportion of real estate is undoubtedly greater than that of stocks.

(4) Deterioration of corporate balance sheets

Real estate and land are important assets and collateral for many companies, and as the prices of these assets have plummeted, Japanese corporate balance sheets have deteriorated significantly. To repair their deteriorating balance sheets, companies had to work hard to repay their debts. After 1991, despite the sharp drop in interest rates, Japanese companies’ external financing continued to decline. By the mid-1990s, Japanese companies had net financing from the bond market and banks. to negative values.

(5) Significant increase in bad debts of banks

A sharp drop in property prices and a sluggish economy have seen bad debts rise sharply at Japanese banks. Between 1992 and 2003, 180 financial institutions in Japan declared bankruptcy [see Yoshino Naoko (2009), International Economic Review]. The bad debt data of all Japanese banks rose from 12.8 trillion yen in 1993 to 30.4 trillion yen in 2000 [see Li Zhongmin (2008) International Economic Review].

(6) High government debt

The continuous recession of the economy and the government’s counter-cyclical regulation have made the Japanese government’s debt pile up. In 1991, Japan’s government debt/GDP ratio was 48%, lower than 61% in the United States, and 99% in Italy, slightly higher than Germany’s 39.5%. In 2014, Japan’s government debt/GDP ratio was 230%, much higher than that in the United States ( 103%), Germany (71.6%), Italy (132.5%), etc.

(7) Declining international status

After 1991, Japan’s economy stagnated, and the relative power of other countries changed significantly. From 1991 to 2014, Japan’s GDP increased by 30%, the United States increased by 194%, China increased by 26.3 times, and Germany increased by 114%. Between 1991 and 2014, Japan’s GDP accounted for 26% of the US’s GDP, and China became the second-largest economy.

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