Saturday, 23 September 2017

A lookback into 1986 - 1991 Japanese Asset Price Bubble

Japan is a wonderful country that I'll be visiting in 1.5 weeks time, and also I'd be staying there for 3 months for my attachment program. Today, I will be looking back into the history of Japan's economy as well as a lookback into the Japanese Asset Price Bubble and the Lost Decade.

Japan's economy is the 3rd largest in the world by nominal GDP (a monetary measure of the market value of all final goods and services produced in a period of time) and the 4th largest by purchasing power parity (an economic theory that states the exchange rate between two currencies is equal to the ratio of the currencies' respective purchasing power). 

Tokyo Stock Exchange is also the 4th largest stock exchanges in the world by market capitalization as well as the 2nd largest stock index in Asia.

So what happened to Japan during 1986-1991??

The Japanese asset price bubble, was an economic bubble in Japan from 1986-1991 in which real estate and stock market prices were greatly inflated. The Nikkei Stock Average finished at 38,916, an all-time high, which is almost double of it's price today.

Japan's economy grew largely. 
At an average annual rate of 10% in the 1960s.
At an average annual rate of 5% in the 1970s.
At an average annual rate of 4% in the 1980s.

This is way higher than the annual growth of US which is at 3.07% back then. 

This is done by inflation, and the average inflation in Japan in the 1980s was 7.81% per year with the aim to curb the appreciation Japanese Yen. 

Curbing the appreciation of Japanese Yen is done as the economy of Japan was led by exports and capital investment for export purposes. When the yen becomes too expensive, there will be lesser trades which will directly impact on their economy. 

In the fall of 1989, Japan's equities and real estate bubbly began to burst with equity plunged 60% from late 1989 to August 1992, while land values dropped throughout the 1990s by 70% towards the end of 2001.  

Nikkei Stock Average 1989-1992

The bubble is caused by:
Credit Expansion: Excessive loan growth quota by the BOJ, lending to anyone regardless of the quality of borrower. BOJ in the late 1989, sharply raised the inter-bank lending rates. Overly leveraged companies has filled it selves with a book full of bad debts and has led to the bursting of bubble and stock market crash.

Uncontrolled Money Supply: In the attempt to prevent the strengthening the Japanese Yen, the BOJ has kept inflation high and printed more money The reluctance to tighten monetary policy, due to economic uncertainty related to Black Monday, it has indirectly caused the impact of the bubble to be more significant.

Over-confidence & Speculation regarding asset and stock prices: With the ability to easily loan money and the excessive monetary easing policy from BOJ, and the speculations of asset & stock prices due to the super-charged bull, investors are over-confident. This has caused the asset prices and stock prices to accelerate rapidly. 

In August 1990, the Nikkei stock index had plummeted to half its peak by the time of the fifth monetary tightening by the BOJ. By late 1991, asset prices began to fall. Even though asset prices had visibly collapsed by early 1992, the economy's declines continued for more than a decade, also known as the Lost Decade.

Over-confidence & speculations???

Lost decade, a period of time in Japan where the economy in Japan is stagnant 
In response to the bubble that burst, companies seek to cut debt and shift manufacturing overseas. This will results in a recession and wages stagnated. This crisis has affected the consumption and investments within Japan. As a result, there was a sharp decline in consumption, which led to long term deflation in Japan.

Deflation happens when interest rates fall below 0% and it increases the real value of money over time. It happens to Japan in the early 1990s to 2006 when the zero-rate policy ended. Japan return to deflation in late 2009 and has been battling with deflation till today for 20 years. This event also triggers liquidity trap whereby many people are holding onto cash instead of placing them into the bank as the interest rates is 0%, and when it is negative, it "eats" into your dollars inside.

It may sounds good that with deflation, my dollars on hand is worth more and that I will be having a greater purchasing power with the same dollar. However, it's good to note that with deflation, it will erode away all our bank accounts and investments, which will pushes many of us into liquidity trap.

Now is deflation a good thing?
Read: My S$1M 23 years before and 23 years later


  1. You should check out the below 2 books for bubbles & madness.... Humans never change!!! Hahaha!!!!

    Extraordinary Popular Delusions & The Madness Of Crowds

    Devil Take The Hindmost

  2. Deflation is extremely good for cash rich & retirees .... But extremely bad for overall economy & jobs.

    Vicious cycle of subdued spending where ordinary people hold onto more cash & only spend on necessities as prices keep dropping (why should I buy a house/car/laptop/latest handphone now when I can buy cheaper in 3/6/12/24 months time??) -- > depressed local economies -- > depressed revenues of domestic companies -- > cost cutting by companies; cutting of investments; retrenchments -- > ordinary people cut back even more ... etc etc.

    1. Hi Spur,

      Will check the books out :)

      Yes indeed deflation will be good for cash rich & retirees as the real value of money increases rather than decreases. Now when that happens, everything we’re experiencing will be totally the opposite. Now.. that’s a little more fearful than inflation.