JAPANESE ASSETS

PRICE BUBBLE

PRESENTED BY : GROUP 7

CHETNA YADUVENDU
RAJAT SINGH BISHT
RISHABH PRATAP SINGH
VAIBHAV DEEP
 CONTENT
• INTRODUCTION
• HOW IT HAPPENED?
• THE LOST DECADE
• RECOVERY FROM THE CRISIS
 INTRODUCTION
•The Japanese asset price bubble (which is known as baburu keiki in japanese language)was
an economic bubble that took place from 1986 – 1991,

•Real estate and stock market prices were greatly inflated, i.e. excessively high,

•The bubble was characterized by rapid increment of asset prices and overheated

economic activity, as well as an uncontrolled and massive money supply and credit
expansion that time.
• The system that fueled the economic boom in the 1980s was the reason to become the
core of the problems in the 1990s.

•To talk about the 1980s bubble, let us talk about Japanese Financial Policy before the 1980s

• Banking Structure up to the ’70s

• Up to ’70s – Division of Labor in Japanese finance
- City banks/industrial banks (public banks)
• Financed large corporations/projects for
• Infra building and industrial policy
- Regional banks, credit unions, Agri-coops
• Financed SME, individuals (self-employed)

•Banking Structure after the ’70s

• Change in the division of labor (late ’70s and early ’80s) – Internationalization of
corporations + Financial liberalization
• Big MNC such as Toyota and Matsushita started financing in overseas markets
• Some of them got able to get financed directly from the markets, i.e., issued corporate
bonds and papers,
• Big banks lost their traditional customers – Banks started demanding deregulation in
banking industry to expand their territories – Big banks started retailing, squeezing other,
• smaller banks – Smaller banks also started demanding financial deregulation

•U.S. also demanded for Japan’s financial deregulation

• The “Twin deficits” became severe under the Reagan administration
– Tight monetary policy in 1981-82
– High government spending's
– Large tax cuts Reaganomics US dollar appreciated Contributed to trade deficits
– U.S. trade deficits against Japan were already politicized since 1960s
– Yen was claimed to be undervalued
• In the early 1980s, US trade policy started becoming
protectionist
• And, the US Government started demanding Japan to liberalize
financial markets
– The “Yen-Dollar Committee” (1983): The reason why
US dollars do not depreciate is because Japanese
financial markets were closed, made it less attractive to
invest.
– Japanese authorities maintained an artificially low
level of interest rates in Japan
• Japanese banks perceived US government as a good ally to
demand further financial deregulation/liberalization with

U.S. Claim to Japan in the pre-Plaza accord period (1981 – 1985)

• Japan was the biggest contributor to U.S. CA deficit
• Japan, with manipulative currency policy, kept its currency undervalued and kept
dumping exports to U.S. markets
• Japan needed to revalue its currency, and
• develop and liberalize its financial markets, so that
• Japan’s excessively high saving rate would go down, and that
• Japan’s enormous current account surplus would be recycled
within the country (or the region), not flowing into the U.S
•So let us know how it all started with their respective timelines :

•Firstly it all started with plaza accord in September, 1985

•1985 agreement among the G-5 nations—France, Germany, the United States, the United
Kingdom, and Japan—to manipulate exchange rates by depreciating the U.S. dollar relative to
the Japanese yen

•named after New York City's Plaza Hotel, which was the location of a meeting of finance
ministers who reached an agreement about managing the fluctuating value of the US dollar.

• designed to reduce the chronic American trade deficits by lowering the value of the dollar and
raising the value of the Japanese yen and West German mark.

•In the same year, Japanese yen strengthened from 236.91¥/U$ (September) to 202.75¥/U$
(December)

•Sharp spike in land prices within Tokyo metropolis; average land prices (per 1sq. Metre)
in commercial districts in Tokyo jumped close to 42% compared to the previous years.

• Endaka recession got worse in the fourth quarter of the same year
• Endaka recession -origins of endaka began in 1971 with the Smithsonian Agreement. The
term was coined with the first usage in 1985 during the Plaza Accord, in which
the yen was revalued sharply overnight..

This Nikkei index shows how enormously the value of yen increased from 11.542 points in
1984 to 38.915 in 1989.
• After plaza accord and consequent devaluation of dollar price, it would have been a
serious issue for the competitiveness for the Japanese industry,
• In order to deal with this situation and risk of the crisis, The bank of japan (BOJ)
decided to take two steps :-
1) Boosting the domestic demand, i.e consumption and,
2) implement an expansive monetary policy that would try to compensate the effect of
the plaza accord,

Therefore, Interest rates in japan were reduced by 50%

• Following the consequences, In 1986,

•In addressing the appreciation of Japanese yen, the BOJ began to ease the
monetary policy, cutting the official discount rate from 5.0% to 3.0%.
• Average land prices (per 1sq. metre) in Tokyo residential areas recorded an increase of
45% (compared to 1985), while average land prices (per 1sq. metre) in Tokyo commercial
districts jumped approximately 122% (compared to 1985). Land prices in Tokyo industrial
sites jumped about 14%. (per 1sq. metre)
• Commercial land prices (per 1sq. metre) in Osaka rose 35% compared to the previous
year.
• In 1987, Japan's economy recovered, entered into a year of expansion by first quarter.
• In accordance to the Louvre Accord, BOJ cut the official discount rate from 3.0% to 2.5%.
• BOJ expressed concern over the asset inflation and signalled the possibility of monetary
tightening policy in summer 1987.
• Nikkei 225 broke the 20,000 level mark by January 30, 1987, and recorded a new high of
26,118 on September 1, 1987. but Nikkei 225 slipped back to 21,564 by December 28,
1987 due to economic uncertainties after the Black Monday of NYSE.

• By the year 1988, Japanese yen strengthened to 123.16¥/U$ by November before

weakening slightly to 123.63¥/U$ in December.
• Nikkei 225 broke the 30,000 level mark and recorded a new high of 30,159 on December
28, 1988.
• Asset prices growth in Tokyo metropolis began to stagnate, especially in residential areas
and commercial districts. Lands in certain wards in Tokyo metropolis began to drop,

• Consumption tax was introduced in Japan in April 1989.

• BOJ tightened monetary policy by hiking the official discount rate from 2.5% to 4.25% by
late December 1989.
• Japanese Yen fell against U$, falling as low as 145.06¥/U$ by September.
• Nikkei 225 continued to be bullish, as it touched a historical all-time high of 38,957.44 on
December 29, 1989.
 THE LOST DECADE
• What happened when the bubble bust happened?
• The false perception of Japanese economy was resilient
came crashing.
• Overnight the stock market saw record plunge, the
household saw steep decline in wealth.
• Japan went into recession as their was liquidity crunch in
the system.
• People defaulted on their ‘Loans’ due to which many of the
banks now saw huge NPA’s, which led to their demise.
Many bank failed during that time.
• Land prices crashed in Tokyo metropolis as residential land on average 1 sq. metre declined
by 4.2%, while land prices in commercial districts and industrial site in Tokyo metropolis
remained stagnant.
• All other major urban land in Japan remained unaffected by the asset collapse over Tokyo
• BOJ continued to tighten monetary policy by pushing the official discount rate from 4.25% to
6.00%.
• Japanese yen weakened to as low as 158.50¥/U$ by April but began to strengthen in the
second half of 1990; it touched as high 129.01¥/U$ by November.
• Nikkei 225 dropped sharply from 37,189 (January 4, 1990) to 23,849 (December 28, 1990),
losing over 35% in value in 1990.
• Asset prices in the Tokyo metropolis stabilized from moving downwards. All other major
urban land in Japan remained in upward trend.

• Japanese yen resumed the upward trend against U$, strengthening back to 129.07¥/U$ by
December.
• Nikkei 225 dropped to 22,984 on December 30, 1991 compared to 23,293 on January 4,
1991.
• Land prices in Tokyo fell sharply. All other major urban land prices in Japan grew modestly or
were stagnant. Towards the end of the year, most urban land prices fell into negative
territory.
• The practice of companies investing money borrowed at low interest 
rates so as to show higher profits than they got
from their business activities alone Known as Zaitech.
• Asset deflation was so rampant that just over a decade real
estate lost 80% of its value.
• In 1996 government raised consumption tax from 3% to
5%.
• Fiscal expansion policy was ineffective due to the fact that
people saw an incentive in holding on to Cash.
• Cost of production became high in comparison to other
developing Asian economy. So, Many Jobs were lost due to
this and Japan saw a period of unemployment.
• The Real GDP didn’t grew significantly for decades due to
social security system crisis and Calamity.
 WHO WAS RESPONSIBLE FOR THIS?
• The Japanese government, Corporation and Banking
institution were hand in glove to make this bubble very huge.
• The Bank of Japan was did not take required step to stop the
madness at Nikkei 225 and real estate market.
• The Keynesian model of economics didn’t bear fruit as the
Japanese government spending wasn’t able to revive
demand because highways, roads, dam, ports, etc. “in the
middle of nowhere that was very unproductive nor it was
able to tackle Deflation in the country.
• Japan society was not active politically, they didn’t have any
faith on Japanese leaders and patiently waited for things to
improve.
 Aftermath and present Situation
• Japanese Investor has been investing in Indian Real estate Market.
• Some Japanese country are moving to India as it has cheap IT Labor.
• Delhi Metro or the setting up of Japanese Industrial Townships (JITs)
having special incentive packages for companies to operate in the
country.
• There is a lot of Japanese Investment coming into the country to finance
a lot of Infrastructure project.
• On December 10, 2019, Minister of Commerce and Industry,
Government of India, Piyush Goyal and Minister of Economy, Trade and
Industry (METI), Government of Japan, Hiroshi Kajiyama, decided to
launch the India-Japan Industrial Competitiveness Partnership (IJICP).
• Japanese Economy hasn’t still not Picked up as it’s debt to GDP ratio is
more than 238.20 percent.
THANK YOU 