Japanese Asset Price Bubble

Jerry Chiu

Jiehong Kong

Frank Murguia

Carlos Nuñez

Foundation for Foundation for BubbleBubble

Japanese industries devastated by WWIIJapanese industries devastated by WWII Post WWII policies & tariffs encourage Post WWII policies & tariffs encourage

savings by the populationsavings by the population Results: Results:

Trade surplusTrade surplus Yen ( ¥ ) appreciatesYen ( ¥ ) appreciates Domestic companies find it easy to obtain Domestic companies find it easy to obtain

moneymoney Japanese products cost less to manufactureJapanese products cost less to manufacture

Inflating the Inflating the BubbleBubble

Opportunity fuels real estate bubble Opportunity fuels real estate bubble in late 1980sin late 1980s

Similar to current US bubble?Similar to current US bubble? Japanese bubble was centered around Japanese bubble was centered around

commercial real estatecommercial real estate US bubble chiefly involved housingUS bubble chiefly involved housing

Recipe for Recipe for DisasterDisaster

The Plaza Accord (depreciate USD The Plaza Accord (depreciate USD against ¥ and DM)against ¥ and DM) Affects exportsAffects exports Econ growth 4.4% (1985), 2.9% (1986)Econ growth 4.4% (1985), 2.9% (1986)

Bank of Japan (BOJ) responds and Bank of Japan (BOJ) responds and cuts discount rate from 5% to 2.5%cuts discount rate from 5% to 2.5%

Monetary policy provides air for the Monetary policy provides air for the bubblebubble

Let the Speculation Let the Speculation

Begin!Begin!

ZenithZenith

Ginza district (Tokyo), prime Ginza district (Tokyo), prime property values at USD 139,000 per property values at USD 139,000 per sq ftsq ft

Tokyo Stock Exchange (Nikkei stock Tokyo Stock Exchange (Nikkei stock index/Nikkei 225) hits record high index/Nikkei 225) hits record high ¥¥38,957.44 in fourth quarter 198938,957.44 in fourth quarter 1989

DownturnDownturn

BOJ realizes the bubble and responds BOJ realizes the bubble and responds by tightening monetary policy, and by tightening monetary policy, and from 1989 to 1990 discount rates are from 1989 to 1990 discount rates are increased five times to cap at 6%increased five times to cap at 6%

Market collapses shortly afterward as Market collapses shortly afterward as a result of lack of investor confidencea result of lack of investor confidence

The Wounded The Wounded NikkeiNikkei

The Japanese stock market indexThe Japanese stock market index Peaked at ¥40,000 in 1989Peaked at ¥40,000 in 1989 Dropped to below ¥15,000 in 1992Dropped to below ¥15,000 in 1992

There were periods in the 1990s when it rose There were periods in the 1990s when it rose in anticipation that the market would bounce in anticipation that the market would bounce back, but the harsh reality is that the Nikkei back, but the harsh reality is that the Nikkei 225 has been in steady decline even to this day.225 has been in steady decline even to this day.

Real estateReal estate From 1991 – 1998 property lost 80% of its From 1991 – 1998 property lost 80% of its

valuevalue

Nikkei 225Nikkei 225

Bank ProblemsBank Problems The banking system was heavily regulated, thus The banking system was heavily regulated, thus

considered institutionally stableconsidered institutionally stable In 1985 the deregulation of interest rates on In 1985 the deregulation of interest rates on

deposits began. Prior to that bank were not deposits began. Prior to that bank were not allowed to pay interest on depositsallowed to pay interest on deposits People invested in the stock market & foreign People invested in the stock market & foreign

investmentsinvestments Deposit Insurance Corporation, which played a Deposit Insurance Corporation, which played a

supervisory role in the economy was mishandledsupervisory role in the economy was mishandled Confidence/naiveness turned into a liability Confidence/naiveness turned into a liability

upon market collapseupon market collapse

The HangoverThe Hangover

Real GDP (RGDP) would flounder Real GDP (RGDP) would flounder throughout the 1990sthroughout the 1990s

1990 - ¥1990 - ¥428,826 billion (USD 1 trillion)428,826 billion (USD 1 trillion) 2000 - ¥2000 - ¥469,480 billion (USD 4.66 trillion) 469,480 billion (USD 4.66 trillion)

Unemployment Unemployment Rose from 2.1 % in 1991 to 4.7 % by year end Rose from 2.1 % in 1991 to 4.7 % by year end

20002000 When comparing unemployment to other When comparing unemployment to other

countries it may seem low, however, 4.7 % is countries it may seem low, however, 4.7 % is unheard of in Japanunheard of in Japan

Decade earlier unemployment never passed 2.8 %Decade earlier unemployment never passed 2.8 %

Japanese GDPJapanese GDP

The Lost DecadeThe Lost Decade

Time period where economic Time period where economic growth stoppedgrowth stopped

Lack of favorable results from fiscal & Lack of favorable results from fiscal & monetary policies (to be discussed next)monetary policies (to be discussed next)

Japanese cultural habits of saving and Japanese cultural habits of saving and frugality didn’t help the situationfrugality didn’t help the situation

Situation persisted until 2003Situation persisted until 2003

Liquidity Trap?Liquidity Trap?

Between 1994 and 2000 the government tried Between 1994 and 2000 the government tried to revive the economy through fiscal policyto revive the economy through fiscal policy

1994 - six spending programs totaling 1994 - six spending programs totaling ¥¥ 66 trillion 66 trillion and cut income tax ratesand cut income tax rates

1998 Q1 – additional tax cuts, this time 1998 Q1 – additional tax cuts, this time ¥¥ 2 trillion 2 trillion Q2 - fiscal stimulus package worth more than Q2 - fiscal stimulus package worth more than ¥ ¥ 16.7 16.7

trillion trillion Q4 – yet another fiscal stimulus package worth Q4 – yet another fiscal stimulus package worth ¥¥

23.9 trillion 23.9 trillion 1999 – the government trys throwing 1999 – the government trys throwing ¥¥ 18 trillion at 18 trillion at

the problem with recession recoverythe problem with recession recovery Finally, October 2000, Japan announced yet another Finally, October 2000, Japan announced yet another

fiscal stimulus package of 11 trillion yenfiscal stimulus package of 11 trillion yen

Results: Total gov’t debt exceeds 100% of GDPResults: Total gov’t debt exceeds 100% of GDP

Next BatterNext Batter

With deflation having gripped the With deflation having gripped the Japanese economy in the early 1990s, Japanese economy in the early 1990s, in addition to the aforementioned in addition to the aforementioned fiscal policy, monetary options were fiscal policy, monetary options were exercised.exercised.

2001 – Central Bank attempts to use 2001 – Central Bank attempts to use its muscle and stop deflation by its muscle and stop deflation by reducing interest ratesreducing interest rates Interest rates are pushed down to near zero Interest rates are pushed down to near zero

for a substantial period of time with no for a substantial period of time with no favorable resultsfavorable results

2009 Japan still has low interest rates and the 2009 Japan still has low interest rates and the Nikkei continues to dropNikkei continues to drop

This DecadeThis Decade

After years of give-and-take GDP growth, 2003 After years of give-and-take GDP growth, 2003 appeared to be the turn around pointappeared to be the turn around point

Junichiro KoizumiJunichiro Koizumi Privatize government agenciesPrivatize government agencies Cut wasteful programsCut wasteful programs Control country’s budgetsControl country’s budgets Develop a plan to get Japan out from the mountain of Develop a plan to get Japan out from the mountain of

debtdebt

Results:Results: Japan saw consecutive growth for first time since 1997Japan saw consecutive growth for first time since 1997 Ultimately situation still worsened but at a slower rate.Ultimately situation still worsened but at a slower rate.

Recent TimesRecent Times Hard won gains, wiped outHard won gains, wiped out

Rise in commodities hurt economy (07-08)Rise in commodities hurt economy (07-08)

Global recession has slowed world-wide Global recession has slowed world-wide demand for goodsdemand for goods

The Bank of Japan suffered a net loss of ¥12.1 The Bank of Japan suffered a net loss of ¥12.1 billion since September, a departure from the billion since September, a departure from the ¥456.4 billion in gains made a year earlier, ¥456.4 billion in gains made a year earlier, culprit to blame were foreign exchange culprit to blame were foreign exchange losses caused by the yen's appreciation and a losses caused by the yen's appreciation and a decline in dividends on shares purchased by decline in dividends on shares purchased by the BOJ from major banksthe BOJ from major banks

Statement of Statement of Monetary Policy Monetary Policy

Nov 20, 2009 release – Boring!!!Nov 20, 2009 release – Boring!!! October 30, 2009

overnight call rate to remain at around 0.1 %

temporary measures, such as purchase of CP and corporate bonds

temporary special funds-supplying operations to facilitate corporate financing

Expansion in the range of corporate debt and asset-backed commercial paper eligible as collateral

complementary deposit facility to provide ample funds sufficient to meet liquidity demand in financial markets.

GDP Comparison of GDP Comparison of Select G8Select G8

Nikkei vs DJI Nikkei vs DJI (Jan 85 – (Jan 85 – Nov 09)Nov 09)

Dow Jones Industrial

Nikkei 225

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