Essay/Term paper: The bubble economy of japan

Essay, term paper, research paper:  Economics

The Bubble Economy of Japan


The Economy of Japan had experience a tremendous growth since the end of the
Korean war. The growth of GNP in 1967 and 1968 was above 10 % (double digit
growth period) which exceed countries such as Britain, France and Germany. The
economy experienced a boost is due to many reasons, such as: enlargement of
industrial facilities, massive adaptation of western technology and education,
lower the military expense to 1% of GNP, relation with power nation, human
resources and their spirit to achieve "zero defect program". But after the first
and second oil crisis that occur from 1973 onward. The economy move downwards
partially due to the poor management of economic policy. Although the government
had attempt to adjust the economic policy but the recovery was slow. As the
soaring of yen continues the demand for export has increase tremendously. With
the concern of the United State of this problem, president Reagan and the G5
have signed an agreement with Japan called "Plaza Agreement" , the agreement
stated that the exchange rate of Japan and Deutschmark can appreciate against
the U.S. . Since then the yen value began to appreciate, Japan was going
through a period of trade balance adjustment. While Japan is prepare to go
through a period of trade balance adjustment, it will also suffer a period of
recession, so the government strongly encourage business activities to
strengthen the economy in order to prevent backwash effect. It was this event
which boost up the GNP and raise the exchange rate. With this exchange rate
advantage it stimulate business activity on housing and stock investment which
created a bubble economy. During this period almost the entire country was
involve in land speculation or other speculate activities. In this essay it
will prove that land speculative activities had create many negative impacts to
the Japanese society and economy. Firstly, it will describe the cause of land
speculation. Secondly it will discuss on the society and political effects in
Japan and lastly it will focus on the economy effects, more over it will include
the aftermath when the bubble collapse.

The root of this bubble economy is due the wave of land speculation. The wide
spread of land speculation activities were mainly because it is profitable. The
speculative transactions in assets grew and grew and many believe that this will
last for very long period of time. One of the reason that leads to massive
investment in the risky activities is because of the success of the Japanese in
the international market during 70*s - 80*s. Many Japanese enterprises and
business man had become very wealthy. These people have a large sum of equity
to invest. Some of these people have focus on risky asset such as stocks and
land, therefore many of the regular ventures were left behind. One of the major
cause of the massive transaction in the land market was due the incremental of
loans by banks. Financial institution was very positive in lending money to the
enterprise. This enhance the accessibility to the land speculate market. Each
size of this loan is very large. This is because the size of mortgage in Japan
financial institutions are based on the collateral, (house) while in North
America the size of the mortgage is based on the borrower*s income stream.
Therefore the size of loan can be obtain by borrower is larger in Japan than
North America. Also 62% of Japanese households own the home that they live and
in average the value is near 4 million yen. Therefore there are lots of
potential investors. And during the period of speculative activities, borrowers
increase the value of their loans as the value of their collateral increases.
Since asset is highly liquidate, the number of potential speculators are high
and borrowers in Japan were able to get a larger size loan on real estate
therefore speculative activities sink into the level of common home owner and
large enterprise. Beside the method of calculating mortgage size, another reason
why the size of loan was so large is probably that both the bank and the
investor were behind the land speculation activity (banking scandal). Investors
were paying some key money (sort of a bribe) to financial institution in order
to obtain a larger size loan. Therefore many financial institutions were over
loan during this period. Another form of raising cash flow for the speculate
market was by braking down a loan that obtain from a large financial institution
to a specific enterprise, then lend a small piece of this loan to those who was
not eligible to obtain a loan from the bank. These companies that act as the
funnel will earn a certain amount of interest from these smaller companies
(branch effect). Therefore all classes of companies and society can easily
access in the speculate market. Other large corporate, construction company,
organize crime group and even temple (religious) were also involve in land
speculation. Another encouragement to the speculative market was because the
government (liberal democratic party) had originally lower the capital gain tax
in the early 80*s. Therefore the profit for owner to resale their land was
large.

Flaws in government policy also indirectly allow investor to get away of
property tax expense. For example some land owner could just plant little crops
over a large piece of expensive vacant land in urban city and declare them as
agriculture land. As a result they will be tax very little. Therefore the
incremental of land speculative activities were due to over size loan, high
accessibility to the land speculative market and indirectly by the government
flaws. During the peak of the land speculation there is a quite interesting
study of land price in Japan. (1) "If you sell the entire property of Tokyo you
can actually buy the entire United state and by just selling the surrounding
land of the Imperial palace you can buy Canada." Although it might of been a
little over exaggerate, but the point is that the land value in Japan compare to
North America is much higher. Since there is no one side of a coin, Land
speculation had create many social problems in Japan. Firstly, land speculation
had rise the rent and housing cost tremendously. As a result many young couples
and low income families were unable to form their own house hold. In average
the cost of a house in Tokyo had raise to about 500 million yen. The younger
group with low income cannot afford it and the mid age workers may also not able
to afford it. Primary is because they would have to give up at least three-
fifth of their income in loan repayment. Also if they have a relatively low
amount of down payment, there working age may not be long to repay a mortgage.
The longer the amortization period, the larger the amount of interest they bare.
The white collar had become the slavery or sacrifice of the never ending
mortgage payment and high cost of housing. In 1990 the births live in Japan was
1.2 million, in fact the number is the lowest since 1893. Many analysts believe
that one of the reason that lead to this slow growth of population could be
create by high house prices. So Japanese people have stopped having children
and large family is rare. Therefore this is one of the causes of Japan is
running our of Japanese. This is also a very big social issue of the modern
Japanese society but the precedent of the slow growth of population has now move
from high housing cost to other social problems. During this period, there were
lots of cases regarding on the robbery and suicidal in the police force. This
was mainly because of the heavily debts that these police bare and they have no
other choice than to attempt to go above the law. Due to the financing problems
in the real estate market, it leads to the founding of what is program call "2
generations mortgage plan". The founding of this plan was propose to suit the
majority of the white collar in the Japanese society. This plan was develop
since 1983 but it became more useful from 1985 onwards and the qualification of
this program must be father-son that plan or already living together. (son must
be older than 20 and must repay the loan by the age at 70) The size of the
mortgage is determined by the borrower, interest is flexible and the applicants
must purchase an life insurance in order to protect the risk of un collectible
due to death. (Pay by the bank) Husband and wife can also join this program .
Banker said that the applicant may able to repay this loan in 40 yr. and this
type of program also encourage a bonding relationship between father and son.
On one side this program may allow a regular income worker to be a home owner
but on the other side this person will bare a debt for the entire life and
passes on to the next generation. Moreover it may limit on the consumption of
the borrower on other composite good. The booms in land prices also discourage
people's incentive to work. (2) "Because if any lucky individuals inherited or
own a piece of land in metro Tokyo, they will suddenly gain a net worth of 250
to 300 million yen." This amount of money is equivalent to honest man*s life
time income plus retire pension. Since may people get rich during this period,
the number of middle class income in Japan had tremendously increase. Under
these circumstances, many believe they have already achieved the good life
therefore people lose the incentive to work hard and get ahead. Therefore it
will distort the social structure in Japan and create many problems to the
government (taxations). Since the sacrifice and cost of home ownership is so
high therefore many Japanese had prefer to rent. Since the demand of rental
market increase, it also attracted many investor and speculator. Therefore
tenants also suffer from the incremental raise of land price. In Japan, young
couples, low income group and the elderly participated as the major group of
tenant in Japan. During this period, owners were looking to sell their property
for high return and in order to force the tenant to move (after tenant moves
landlord can chose higher quality tenant or resale the property for a larger
profit) rent rises extremely high. Many elderly were unable to afford such high
rent so many were force to move. As a result many had become homeless. In some
cases tenant refuses to move so some owner will hire organize gang group to
force them out. Some of these unfortunate tenants will give up the hope in home
ownership in the core and move further and further away from the center.
Therefore many of them will spend over 2 to 3 hours to commute from their place
to work. So either way, home owner ship and tenants suffer from the raise of
housing price. The natural populations are not the only civilian of this
incident. Many foreign students also suffer from the housing problem. (3) "In
1986, there was a statistic taken over a total number of 8116 foreign students.
Apparently only 17% lives in an adequate resident facility." The primary reason
was due to the cost of rent, high exchange rate and lastly it was because the
local people do not wish to rent their property to foreign student. Student
associate had propose to built new resident housing but due to the heat of land
speculation (create an increase in the demand of land) and high construction
cost, the new residential housing will be very costly. Therefore this new
construction will probably raise the rent 2 to 3 times. While the housing
problem continues for foreign students from 80 onward the Japanese government
had still declare that they (4) "expect a total of 100,000 new foreign student
will be coming in during the 21st century." This reflects that the government
has pay very little awareness not only on the natural population but also
foreign student. Beside foreign students and the natural population, another
group that affects by the high land prices was foreign ambassador. As the price
continued to rise (specially in Tokyo), the ambassadors of the lower wealth
countries (such as Africa or Uganda ) were force to move their location away
from Tokyo due to high rent. Although this problem was reflect to the Japanese
government but it was remain un solve. Other side effects of the land
speculation was the new residential construction during that era. In (thousand
leaf city) many of the new construction area no longer have a large plain or
play ground that similar to a traditional residential area.

In one of the Japanese newspaper there is an advertise article that describes
their forecast on the living condition of the Japanese in the 21st century. (5)
"The husband should not return home until weekend, during weekdays just live in
worker*s resident near their workplace. This resident housing should be similar
to hotel where it has an into desk that can wash your cloths, postal service and
take your message. Their home should be in some rural or less urban area that
100 km away from work." This reflected that the rise of land value did not just
only effect the affordability of the housing but also distort the lifestyle of
the Japan workers as it had reflect in the earlier incident of the 2 generations
mortgage. (6) "During the bubble economy period the zoning regulation in Tokyo
has revise to allow builder to built more capital on the piece of land. So this
indirectly rises the potential of building space in Tokyo. It will again raised
the real estate value, property taxes and traffic congestion level of the area."
According to the (7) "National Land Agency statistic, about half of firms
surveyed in the mid to late 1980s responded that they had no development plans
for the land that they acquired." They rarely built homes or apartments, but
instead constructed office buildings that would bring in steady revenues. From
the developer*s point of view, houses and apartment are the least profitable
projects. So land would almost never allotted for housing". With land
speculation and the shortage supply of new construction on housing the Japanese
residents are very difficult to find an affordable place to live beside the
houses that are very far from work place. In the current Japan election the
percentage of participant voters in Japan has drop below 60% of the total
population and the liberal democractic did not receive 50 % of the seat through
election. This percentage was the lowest since WWII and mainly was because the
populations in Japan no longer believe the liberal democratic party can bring
them back from recession. Also they did not have a good control system during
the bubble economy, failure of the recovery program after the bubble
splash.(program such as expansion in public investment, lowering the interest
rate and series of economic counter measure but the yen is still pretty high
which discourage export) In more specific, during the bubble economy the
government did not really propose an effective tax law until 1990. (National
Land Value Tax- prohibitive tax on profits from the sale or transfer of land
national land law 1974) This revitalizes the local property tax and assessment
ratio for the fixed asset tax. Another official policy was issue during 1990
was through the financial market in which the government regulates on the loan
activity. This eventually slow down the loan activities largely in 1991. But
still the government really lagged their response for those who already suffer
for 5 years of high housing cost. More over during the period of bubble economy,
many politics were either involve in land speculation or was bribe by organize
gang group and large enterprise in order for these people to be more
conveniently to have more benefits in the land market. One incident is involve
by a business man Kyowa and a cabinet minister Fumio Abe, where Abe sold the
details of where a new road construction in Hokkaido in return for 480 million
yen. Political scandal was expose to the public not long after the bubble
economy was splash. Lastly, most of the asset of the politicians are in the
real estate market therefore neither the bank or the officials admit the fall in
land prices. So when this incident was expose to the public, the prices of land
fall sharply around 50 %. And mainly because of the period of cover up. So many
big and small investors suddenly woke up from their happy dreams and face the
horrible reality. With the above reasons the government has lost the trust of
many Japanese. Therefore the land speculate activities had also effect the image
of the strong liberal democratic. During the bubble splash period, many pre-
graduates and graduated university students were unable to find jobs in the
labor market due to the diet all companies therefore many students were
frustrate about their future. Therefore the supply of the labor market is
distorted by the bubble burst. Therefore you can see that the land speculation
activities had create many social problems to the Japan society during the
bubble period and after the bubble burst.

During the bubble period the economy was strongly boost by the sudden rise of
land value and stock market. On the other hand the after math of the bubble
splash was a pain for the economy. In general we will look at the effects on the
rise and fall of the Japan*s economy.

In 1985 the trade balance in Japan need to have adjustment therefore the
government declare that it needs some force to grow in order to prevent
recession during this adjustment period. (8) "In 1989 the GNP has increased by
481,000,000,000,000 yen and this was mainly due to the speculate market."
(People put their profit from land to stock market or vice versa) Many companies
were mainly focus on the speculate market. (9) "The Tokyo Stock exchange soared
to almost 40,000 points, the value of stock and land was far above the real
value and value of property was not rise due to its demand but was due to
speculation. Eventually when the bubble splash, the vacancy rate went rocket
high due to lack of demand. Many companies had to go on a strict diet to survive,
and they made deep cuts in expenditures for entertainment, advertising,
communications and much else." And the above statement is the general picture of
what happen during the bubble economy. During the golden period of land
speculation, many investors know that the land market in Japan was limited (due
to the potential and limited geographic area) so they began to purchase land
over sea in Hawaii. (10) "The Non water front housing price in Hawaii during
1987 went up by 51 % and the water front housing price went up more than 100%."
This resale land market in Hawaii was primarily between the Japanese; in 1987
the land prices was estimate has rise over 60.2% and many tenants have suddenly
realize that the rent has tremendously increase and cannot afford it, so many
people have no place to stay (especially the elder). There are several reasons
that Japanese wants to invest in Hawaii such as; the waterfront view is similar
to Japan so it will be a good place for vacation and retirement, the distance
between Japan is relatively close ( 3 hours trip by plane) and massive left over
of equity and advantages in the exchange rate that has tremendously increase the
nominal value of their equity so it is an encouragement for investment.
Therefore the wave of land speculation did not only distort the land market in
Japan but also affected foreign country.

Looking back at the Japanese economy (11) "in 1987, 77 out of the top 100 most
heavily taxed people were involve in land speculation (either have resale their
lands or have large land properties). This created a very unhealthy economy
because most of the economy is depend on the land market and if any thing happen
to the land market, it will distort the economy greatly. (12) "In 1989 the top
100 most heavily tax people 95 of them were involve in land speculation."
Therefore the situation was worst in the later period this is mainly because of
the profitability in the land market. Since many enterprises only focus on
speculate market therefore the real growth of GNP of the country was only 4 to 6
%. The growth of the economy was mainly on the nominal sector. The increase in
nominal GNP has created massive appreciate of yen, which had tremendously affect
the export businesses and the manufacture industries. (the nominal price of the
good has increase therefore foreigner has less interest on Japan goods but this
mainly effect small and medium enterprise) While some export business was not
doing too well, consequently the workers are not getting an appropriate rise in
income. (13) "In 1986 (Nissan) several of the high executive had experience an
income cut by 5 to 10% and many of them are very frustrated because most of
these people were in their 40*s and have to pay for mortgages and children*s
tuition. In later years Nissan had announced to cut 500 in order to balance out
their lost." Therefore large manufacture as Nissan was not doing so well during
this period. This was worst in the case of the small and medium enterprise.
Many small and medium size export companies had contract or even close down
during the mid 80*s and as the wave of income cuts continued, every level and
class of the employees were involve. On the other hand the high exchange rate
was really an advantage for importer (same value buy more) such as energy,
petroleum and primary material. These companies were suddenly becoming so
wealthy and the income of their employees were much higher compare to those
working in the export enterprise. Therefore there was a large gap on the profit
and income between the two distinct groups of company and it was very unhealthy
for the white collar.

This period of high exchange rate continues until the bubble burst. The decline
of the bubble economy occurs during the Gulf war period, the economy in Japan
was very quite and at the same time the government had tighten their policy.
(Both tax policy and restriction in loans) As a result, the land speculation
market and land prices fall continuously. The real estate market is totally
frozen. The National Land Agency measures that land price of Tokyo and Osaka has
dropped 30 to 50 percent. (Total land wealth is near 2000 trillion yen which is
really a lot) Many real estate properties were unable to be resale and at the
time many companies were unable to pay such high interest payment therefore many
of them went bankrupt. While the banks rarely make any loan, many companies cut
back in their capital spending. In fact this had dampen the recovery of economy.
Most of these companies that went bankrupt were either small or medium size
enterprise which lack of its separate bank center. Large enterprises with
separate bank center also suffer from non performing loans by the borrowers
(small and medium size enterprise). Others large lending institution also suffer
largely, since the major economic powers at the bubble period was on the land
market therefore any decline in land values would strongly influence the balance
sheets of Japan*s lending institution. As reported in June 18 1996 The News
Times International News that the (14) "parliament approves a $ 6. 3 billion
bailout for bankrupt housing lenders. The vote clears the way for the
establishment of an institution to liquidate the assets of the housing lender
which collapsed under bad loans made to real estate speculators before Japanese
land prices plummeted in the early 1990s. The seven companies are believed to
have more than $65 billion in bad debts." This $.6.3 billion is only a piece of
the big picture because (15) "the Finance Ministry said that Japan*s financial
institutions held about $324 billion in bad loans as of March 31 1996. Analysts
believe the total could be considerable higher. The government in recent days
has been working to persuade banks and farm cooperative to agree to take on a
bigger share of the bailout burden to reduce the cost to taxpayer". According
to a current financial post in Tokyo: (16) "Most of the financial banks declare
yesterday that with the experience of deficit in last year, this year (ended
till September) they had turn deficit into net profit.

Banks had systematically write off many of the un collectible accounts. But
their revenue is still not very high because of low interest rate and the
incremental of bad debts. Therefore financial institution will still probably
experience quite a long period of recession." Therefore residue effects of the
land speculation spill over still continues. Land developers also suffer
largely. Before the land market crash was expose to the public, there were
nearly 1,200 golf course was either approve or under construction. Many pre-
member ships were sold but unfortunately many of the construction are never
finish because of banks were pulling back the loan. At peak, the total value of
golf member ships market in Japan was near 200 billion for 1,700 golf courses.
Therefore closing down 1,200 golf course construction was quite a lost for the
economy. Another aftermath of the bubble burst is the high vacancy rate in the
office buildings in Tokyo. During the late 1980*s, the new constructing rate
(for the office buildings) was double compare with the tradition. After the
bubble burst, the value of asset decreases and demand for space also decreases.
Therefore many office buildings are unoccupied. As you can see, the after math
of the bubble burst did not only affect the business enterprise, government but
also the grass root people. (17) "In last year the economic growth rate was
only around 1% or less and the government had introduce economic revitalization
policies such as lowest ever interest rates and increased public investment but
judging by the fact that consumer demand has cooled off and capital investment
by the corporate sector is not making headway as expected therefore the outlook
for economic recovery in Japan remain hazy". The bubble bursting has affected
everyone in Japan. (18) "The country has clearly become a victim of the same
wrenching process of debt deflation that had already been visible for several
years in so many other economies. Japan faces the reality of outright deflation
in terms of falling prices. With all that implies for companies inability to
maintain their profit margins. Japan was facing by the autumn of 1993 an
unpleasant combination of excess production capacity, falling demand and a
rampantly high yen. By August 1993 wholesale prices were declining at an
annualized rate of 4.2 percent." Once again you can see that many Japanese are
not very optimistic about the future economy.

Therefore you can see that the land speculation had create many negative impacts
to the Japan economy not only during the bubble period but also after the bubble
burst.

Bibliography

(1) - Wood, "The Bubble Economy", Sidgwick & Jackson, London 1992 pg. 50

(2) - Wood, "The Bubble Economy", Sidgwick & Jackson, London 1992 pg. 61

(3) - Cao Man Kit, "The Life of Foreign Student in Japan", Ming Chang, H.K.
1991, pg.160

(4) - Cao Man Kit, "The Life of Foreign Student in Japan", Ming Chang, H.K.
1991, pg. 167

(5) Cao Man Kit, "The Strategic of Japan Enterprise", Ming Chang, H.K. 1992,
pg. 68

(6) Mc Millian Charles, "The Japan Industrial System", Berlin, New York,
1996 , pg. 56

(7) Wood, "The Bubble Economy", Sidgwick & Jackson, London 1992 pg. 89

(8) Iwami Toru, "Japan in International Financial System", MacMillian Press,
New York 1995, pg. 135

(9) Iwami Toru, "Japan in International Financial System", MacMillian Press,
New York 1995, pg. 135

(10) Kenneth V. Smith, "Inman News", June 1996 Version, Section B4 email
address: InmanNews@aol.com

(11) - Iwami Toru, "Japan in International Financial System", MacMillian Press,
New York 1995, pg. 178

(12) Iwami Toru, "Japan in International Financial System", MacMillian Press,
New York 1995, pg. 178

(13) Cao Man Kit, "The Strategic of Japan Enterprise", Ming Chang, H.K.
1992, pg. 135

(14) - Kenneth V. Smith, "Inman News", June 1996 Version, Section B4 email
address: InmanNews@aol.com

(15) - Kenneth V. Smith, "Inman News", June 1996 Version, Section B4 email
address: InmanNews@aol.com

(16) - Herman Li, "Sing Tao News", November 23 1996, Toronto, Section B 12

(17) Wood, "The Bubble Economy", Sidgwick & Jackson, London 1992 pg. 205

(18) Wood, "The Bubble Economy", Sidgwick & Jackson, London 1992 pg. 206