May 22, 2007

I thought you'd all like to freshen up on other classic bubbles. Here's Japan

Japanese asset price bubble

Inflation-adjusted house prices in Japan (1980–2005) compared to house price appreciation the United States, Britain, and Australia (1995–2005).


The Japanese asset price bubble was a time of skyrocketing land and stock prices in the Japanese economy, lasting from 1986 to 1990. It is one of the most famous economic bubbles in the history of modern capitalism.

In the decades following World War II, Japan implemented stringent tariffs and policies to encourage the people to save their income. With more money in banks, loans and credit became more easy to obtain, and with Japan running large trade surpluses, the yen was able to appreciate against foreign currencies. This allowed Japanese companies to invest in capital resources much more easily than their competitors, which made goods cheaper, which widened the trade surplus further. And, with the yen appreciating, financial assets became very lucrative.

Unfortunately, with so much money readily available for investment, speculation was inevitable, particularly in the Tokyo Stock Exchange and the real estate market. The rates for housing, stocks, and bonds rose so much that at one point the government issued 100-year bonds. Additionally, banks granted increasingly risky loans.

By 2004, prime "A" property in Tokyo's financial districts were less than 1/100th of their peak, and Tokyo's residential homes were 1/10th of their peak, but still managed to be listed as the most expensive real estate in the world. Some US$20 trillion (1999 dollars) was wiped out with the combined collapse of the real estate market and the Tokyo stock market.

With Japan's economy driven by its high rates of reinvestment, this crash hit particularly hard. Investments were made increasingly out of the country, and Japanese manufacturing firms lost much of their technological edge. As Japanese products became less competitive overseas, the low consumption rate began to bear on the economy, causing a deflationary spiral.

The easily obtainable credit that had helped create and engorge the real estate bubble continued to be a problem for several years to come, and as late as 1997, banks were still making loans that had a low guarantee of being repaid. Correcting the credit problem became even more difficult as the government began to subsidize failing banks and businesses, creating many "zombie businesses".

The time after the bubble's collapse, which occurred gradually rather than catastrophically, is known as the "lost decade" in Japan.

35 comments:

Anonymous said...

I'm Japanese. To me, this housing bubble is a total deja vu.

My memory about the Japanese 80s bubble is a bit blur because I was a high school kid at the time.

This is what i remember:

There was a Fannie Mae, called Jutaku Kinyu Kouko. There was a subprime mortgage called "Yutori loan" which means "affordable loan", that was not affordable at all, caused so many foreclosures.

My parents bought a little house in a suburb of Tokyo, about 5 years before the peak. They saw their house value went double. After the bubble burst, they noticed the house become 1/3 of the peak price. They had started a business using HELOC type loan.

Luckily, they didn't fail.

Some Americans tell me how America is different from Japan, when I talk about this.

I don't know where they got this 1/100th thing. It is probably about some particular commercial spot.
The US media love to treat Japanese like freaks.

New 3br houses still cost at least $500K within the 20 mile circle of Tokyo metro area. New 70sf condos are about $300K to $400K.
Pre-owned houses are about the half of the new house price, but it is really hard to maintain them in this super humid country.
Most of first time buyers get a new house or condo.

My father was flipping the foreclosed condos after the bubble.
According to him, the people buys them are mostly f#ck-ups and illegal immigrants. He can't make much money than his efforts, so he stopped.

I am currently living in Tokyo and not going to buy any properties here.

I am waiting to buy the US properties.

Anonymous said...

To the poster above me...good post. I have lived back and forth between Japan and the US all my life. For the past 16 years I have been living in a rental place also in a Tokyo suburb ( 野区 ). I've watched the whole thing unravel. What has been suprising to me how well Japan has preserved its middle class and sense of at least superficial affluence. Sure, there is lots in the media all the time about the increasing gap of rich and poor but the situation is still better than the USA or even Europe. I have lots of theories about this but they aren't "politically correct" so I will hold my tongue.

Be that as it may, the government deficit situation is particularly bad, and I don't see how they expect to make the whole thing work. I pay into Japanese social security but it looks even more unstable than the US system...although I guess both are so deeply mired in debt its pointless to speculate about who has it worse. They talk about a "second bubble" and a "new Japan boom" centered around the new money in Roppongi (Hirusu zoku, Tokyo midtown, all that trendy bling bling) but I just don't see it happening. My prognosis: slow and gentle decay. I just hope I'm dead before the system really breaks down here because on a fundamental level there isn't much here except resourceless volcanic rock covered with thin topsoil. Food security is waining every day and Japan imports 98% of its oil. Ugly clouds on the horizon.

Midtown said...

I live in Tokyo as well. Later this year my office is moving to the new Tokyo Midtown complex. What an ostentatious waste! I'm just gonna continue to (US) bubble-sit and go scoop something up once prices get reasonable.

Anonymous said...

This time it's different.

The US is special.

Anonymous said...

Hi from Kobe,

I bought the house I live in for under $20,000 US about four years ago. The prices here are slowly rising, but there are still plenty of cheap places. Comming from Canada, I found this to a real bargain.
Rick

Anonymous said...


I have lots of theories about this but they aren't "politically correct" so I will hold my tongue.


Don't. If you have an observation state it. If others have a problem with that, it is exactly that, their problem.
I am an american who has done a little business in Japan over the last four years. I think that Japan does many things well and some things not so well. The japanese try to take care of themselves and they are not, and should not be, ashamed of that.

bickerer said...

>The US media love to treat Japanese like freaks.

This is not a true statement. The media simply takes any stereotype and magnifies it. The Sean Connary movie Rising Sun portrays Japan as the total future. They will own everything, probably even you, don't f with them ever.

http://www.imdb.com/title/tt0107969/

The fact that the film was made in 1993 shows that the media not only magnifies, but lags quite a bit as well. Hey, that's what sells.

Anonymous said...

It's different in America. Economics and numbers don't matter here. Everyone wants to live in America, especially Idaho and Oregon and Minnesota and New Jersey and Tennessee andAlabama and Salt Lake City and Colorado and Podunk City

Anonymous said...

The "lost decade" was the time I spent in College.

Anonymous said...

My "lost decade was when I ah....
....mmm........I forget

Lost Cause said...

Official government policy is that we hate Isamists.

We quit hating Japan after Bush Sr puked on the PM's leg.

yuccatree3 said...

Speaking of Japan's "lost decade"--Is it true that Japan's vaulted "family values" have deteriorated because of all the stresses of the "lost decade"? Are there really that many young Japanese adults who have given up and stay at home or is it just bad PR from the US press?

The Thinker said...

I have been to Japan, and I can tell you that as far as I could tell, Japan is VERY different than the USA.

Bubbles are very psychological, so it is reasonable to assume that things will not play out here quite as they have there. It is true that greed and fear are universal, but how people react to that greed and fear can be very different.

For one, the Japanese like to save money while the Americans love to spend money they do not have. Accordingly, Americans would seem more likely to take on additional debt and less likely to cut their spending even when they run out of money to spend.

While the Japanese behavior is individually wise, it is bad for an economy. The American behavior is individually stupid but good for the economy.

I would therefore predict more personal pain here and less pain to the broader economy.

Anonymous said...

you spend 10 years in college? no wonder you rent

Anonymous said...

what's this then...a new dow record!!!

Keep buying those 5% CDs losers.

Anonymous said...

Japan survived its bubble burst far better than the US will.

I don't recall Tokyo being ruled by armed gangs of welfare-sucking, and occasionally rioting, illegal aliens. By contrast, been to Miami, or Los Angeles, or Houston lately? American is in full-blown, fall-of-Rome, barbarians have taken over, decline. It's going to be nasty when the 20 million illegal aliens in the nation decide to behave like savages. Stay tuned.

Anonymous said...

It's a slow news day today in bubbleville.

Anonymous said...

Thank you to all posters about this japanese bubble. Here in Paris, we also have a significant housing bubble.

Hopefully nothing like the one that plagued (or currently plaques) Japan the US or Spain, but some kind of a collateral effect.

It really looks like the "money system" has gone completely perverted. On an international basis.

Monetary inflation is present nearly everywhere.

Being in a non-financial job whole my life, I never care the issue displaying naive faith in governmental price control.

I do not intend to be overly gloomy here. But I really believe that this bubble is totally international will be far more destructive than the japanese one.

The scope is so wide! The sooner the better for all of us!

Anonymous said...

Thank you to all posters about this japanese bubble. Here in Paris, we also have a significant housing bubble.

Hopefully nothing like the one that plagued (or currently plaques) Japan the US or Spain, but some kind of a collateral effect.

It really looks like the "money system" has gone completely perverted. On an international basis.

Monetary inflation is present nearly everywhere.

Being in a non-financial job whole my life, I never care the issue displaying naive faith in governmental price control.

I do not intend to be overly gloomy here. But I really believe that this bubble is totally international will be far more destructive than the japanese one.

The scope is so wide! The sooner the better for all of us!

TM said...

Well, the situation is (for now) different in the US. Unless the government steps in for the big bailout (which it just might), the U.S. has a higher likelihood of returning more quickly to fundamentals and equilibrium. Instead of the lost decade, it can be instead a lost 3-5 years.

But again, that's only if congress doesn't panic and end up creating US versions of zombie companies.

Anonymous said...

I don't think the U.S. media treats Japanese as freaks. If anything we admire the Japanese technical skills and there ability to take a U.S. product and make it better (ie autos).

Japan has not had the profit motive in industry like the U.S. even though Japan profited tremendously in the 80s. I was fortunate to have a partner interest in a Hawaiian hotel which was bought by a Japanese company.

The U.S. housing bubble will be no different than the Japanese housing bubble. It's all fueled by greed.

panicearly said...

i read in the Yomiuri shimbun about 4 months ago that inventory is getting quite tight in tokyo 23 wards.
Only 6280 or so condos on the market at that time.
Here in Shibuya where i live, there are only 17 last month. I get flyers in my mailbox everyweek from realtors
looking for customers who want to sell, land or condos.
im lisitng my place in shibuya in August....

Anonymous said...

Concerning "Lost Decades", the US has been in a bear market for real science and engineering work since the cancellation of the supercollider project in '94.

When everyone with a BS/MS in the sciences becomes a coder (or a doctor or patent agent), then only a decline in the nation's research infrastructure can follow. And that was the late 90s and the subsequent fall out in the 00s.

Anonymous said...

The U.S. market can be worse than "Japan". Let me explain! The Japanese are honorable people. They will repay their debt. Nothing worse than a dead beat in Japan, plus often a family member has to co-sign. So if you don't pay you dishonor the family.
There isn't much land in Japan, so building costs are high. The whole supply vs demand is better than the U.S.

In the U.S. it is nothing to go bankrupt. Who cares! Land is cheap! There is so much over building, and the building quality is low. 2X4's and some dry wall! Cheap! So the situation in the U.S. can be much worse than Japan. People will just walk away and let the banks and government eat the lose.

This has been the biggest bubble in history and will lead the U.S. and the rest of the world into a drepression that will be in there with the Great Depression! Just wait and see!

Anonymous said...

"Anything that smacks of no-income and no-documentation is history," he said. "Anything above 85 percent to 90 percent loan-to-value, anything non-owner occupied, anything ludicrous as to value - like someone stepping up from a $1,000 a month payment to a $6,000 a month - is history."

Anonymous said...

Subprime bust speed stuns lenders
May 22: Many mortgage lenders expected a subprime meltdown, but not one that came so fast and strong.

Anonymous said...

"The Japanese are honorable people."

You've watched too many old movies, sport. I've done business with the Japanese for 12 years, and they are no more honorable than anyone else, and probably a good deal less so. Ask anyone who has done substantial business with them, they will bust every clause in contract they can. Go and get some REAL WORLD experience, sonny boy, and quit sounding like a typically clueless American who never got off the couch.

Anonymous said...

Yoo like flied lice with yoo slimp steak?

Markus Arelius said...

Domo arigato, Keith.

What a frightening scenario!

macaca said...

$20 k for a house in Kobe?!! hard to imagine. was it a modular jobbie put up after the earthquake? how many square feet? what's the current market value.

as for how the japanese faired thru their recession, it might have something to do with their concept of "gaman" which roughly translates into persevering through suffering. given their high population density they seem to have got thru better than the u.s. would have with its hyper-individualism, but japan also has alot of social problems like the "hikikomori" , usually young kids who withdraw from society after being pushed to compete. if the u.s. has a severe depression probably will be pretty bloody with all the guns available. temperature is already high over the illegal immigration issue... will only get uglier after the economy tanks.

Midtown said...

"I get flyers in my mailbox everyweek from realtors
looking for customers who want to sell, land or condos."

I get that crap every single day where I live.

Who Flung Poo said...

"Yoo like flied lice with yoo slimp steak?"

This arse needs to DIAF (die in a fire) with all the other people who consider Asia freakish. These morons can't even get the countries straight--the above is like making a Polish joke directed at Spaniards.

Anonymous said...

@macaca

I purchased the house in 2003. It was the 3rd house that I bought in Hyogo Ward-near JR Kobe station. It was built in 1923. . . surviving the bombing of Kobe and the earthquake. it is around 900 square feet and was purchased for 2 million yen (so, under $20,000 US). Believe it or not, I don't care. There are lots around here for that price.
Rick

Anonymous said...

Hense, the problem with illegals..........

Anonymous said...

The Fall of the Horizontal Keiretsu

For years, the banks didn’t make loans to companies for business purposes very much. Some lending but it was a very minor part of their lending. What they did was lend out money based on real estate valuations or on stockholdings – these Keiretsu as they called them, where they had these interlocking holdings of stock.

So, what you had was a price maintenance system for the stocks in the Keiretsu and you had a price maintenance system for the real estate, because everybody understood that once they started selling the real estate, that it was going to crash because the valuations were so excessive.

So it took a long time before the liquidation process came along but it proceeded then and what you never know, of course, in a process like this, is when it’s going to be over. Now I’m not saying that all the excesses have been purged from the banking system, but I know of no precedent of eight and a half years of falling back loans…that’s truly amazing.

So, maybe we’ll go back into more reduction in bank loans, but that one figure was, to me, an epochal one. And that went along, then, with my conversations with global investors who were saying they were seeing lots of value in the Japanese market. In other words, the market, the index is a collection of different kinds of stocks put together. What we needed to do was to take out the heavy weight in the index, the two kinds of heavy weights that came from the banks.

First of all, their own market capitalization, because, at the peak of the ten biggest banks, I recall, nine were Japanese. And maybe only one or two of them were really good banks. So, you had to collapse that capitalization and take it out of the index. Then what we had to do was see what happened to valuations of other equities as the Keiretsu were unwound.

http://www.siliconinvestor.com/
readmsg.aspx?msgid=21733510