This volume brings together various analytical studies the IMF staff has undertaken on the Japanese economy, focusing on two areas of particular interest for both longer-term economic performance and recent cyclical developments. The first is Japan's saving behavior, the second is the remarkable swing in asset prices that occurred in the late 1980s and early 1990s.
This paper examines the stock and land price behaviors during the bubble economy period (the second half of the 1980s), paying considerable attention to the linkage of the two markets and the effects of monetary policy. In particular, we examine whether the booms in these asset prices can be justified by changes of the fundamental economic variables such as the interest rates or the growth of the real economy. A complex chain of events is needed to explain the process of asset price inflation and deflation. Our empirical results suggest (i) that the initial increases of asset prices are sown by a sharp increase in bank lending to real estate; (ii) that a considerable comovement between stock and land prices is consistent with a theory that emphasizes the relationship between the collateral value of land and cash flow for constrained firms; (iii) that although the real economy was doing well and the interest rates were still low, asset price increases from mid-1987 to mid-1989 cannot be fully justified by the movement of fundamentals alone; and (iv) the stock price increase in the second half of 1989 and the land price increase in 1990 is not explained by any asset pricing model based on fundamentals or rational bubbles.
With the recent collapse of the asset price “bubble,” Japanese banks encountered significant pressure from both a sharp decline in the value of equity holdings and a marked increase in bad loans. In August 1992, the Government initiated measures that stabilized equity prices and assisted banks in managing their nonperforming loans. While the major banks disclosed that 4.6 percent of their total loans were nonperforming at the end of FY 1992, a mechanical estimate of all banks’ nonperforming and restructured loans is 6-7 percent of their total loans--a serious yet manageable problem. The main policy implications are to ensure the reasonably prompt resolution of the bad loan problem and to enhance market discipline to prevent its recurrence.
Master's Thesis from the year 2013 in the subject Business economics - Economic Policy, grade: 1,3, University of Bamberg, course: Volkswirtschaftslehre Dynamische Wirtschaftspolitik, language: English, abstract: Repeatedly bubbles occur during times of “extended investments in infrastructure such as canals or railroads”(Charles P. Kindleberger, “Manias, Panics and Crashes“, p. 10) or around technological inventions that are made available for the general public such as cars, electricity, phone – lines and the internet. They go hand in hand with financial inventions, financial liberalization and excess leverage. Examples are, among many others, the Japanese Asset Price bubble of the late 1980ies and early 1990ies, the Dot-Com bubble 1997–2000, as well as the recent Financial Crisis 2007-2008. Frequently these bubbles are fueled by the overoptimistic outlook not only of the so-called experts or gurus but also by the extremely positive perception of the general public resulting in a “this – time – is - different – feeling”, “new – era – talks” or the “it –won’t happen – to – us – believe”(See for example Shiller, Kindleberger, Reinhart and Rogoff, Galbraith). Most of the time these bubbles are self – feeding processes. Business expansion leads to economic growth and greater income. Public spending increases which leads to the need of expanding production. Credit is needed for investment and during times of a boom it is easily made available. Often new financial instruments come into play as well as the deregulation of financial markets to meet the demand for credit. Businesses can expand further which results in ever increasing income and greater expectations about the future. Creditors become less risk averse and grant loans to individuals or firms that would have not met the necessary requirements before. People feel richer since their wealth is re – classified so that their assets and property are all of the sudden worth more for no realistic reason (renovate a home for example which would account for an increase in value). In combination with low interest rates, more and more investments and purchases are financed through excess leverage creating a vicious cycle of easy credit, money illusion and the adjustment of fundamental values. Great hikes in the markets are considered as a result of the new economy that has been created. Historical levels of the markets and where the level of fundamentals should really be are completely ignored. Currently we can only assess bubbles in retrospective, psychological factors which may help to explain the unexplainable are hardly considered in basic economic models.The only thing that is certain is that bubbles always burst.
