What Was Japan's Asset Bubble?

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Tokyo share prices ended 1989 at their peak

On the last trading day of 1989 the Nikkei 225, an index of Japanese share prices, closed at ¥38,915, its peak. Japan's economy had been growing since late 1986, according to the government's Economic Planning Agency. Land prices in Japan's major cities had been rising for several years. This module follows what rose, when the rise ended, and how far prices fell.

Share prices rose faster from 1986

Japanese share prices had been climbing since 1983, and the rise sped up in 1986. Between September 1985 and the end of 1989 the Nikkei rose to 3.1 times its level, on Bank of Japan economists' figures.

The chart shows a different measure, the International Monetary Fund's (IMF's) index of Japanese share prices, as an average for each month. It rises through 1986 and the first half of 1987, dips late in 1987, and climbs again to its peak in December 1989.

Land for shops and offices rose almost fourfold

Land prices rose too, a little later than share prices. The rise began in Tokyo, spread to other major cities such as Osaka and Nagoya, and then to smaller ones. On an index kept by the Japan Real Estate Institute, the price of land for shops and offices in Japan's six major cities reached its peak in September 1990, at almost four times its level of September 1985.

Bank of Japan economists later worked out the yearly gains in value on all the shares and land that people and firms in Japan held, each as a share of GDP, gross domestic product, the value of everything Japan produced in that year. Added year by year, the gains for 1986 to 1989 came to 452 per cent of GDP. The same sum for 1972 and 1973 had been 193 per cent.

The economy grew fast alongside asset prices

The rise in asset prices came with a boom in output. On the Economic Planning Agency's dating the economy grew for 51 months, from November 1986 to February 1991, and output grew by 5.5 per cent a year on average after allowing for inflation, the general rise in prices. Firms' spending on new buildings and machinery stayed at almost a fifth of GDP, and households spent more on new homes and on durable goods, ones meant to last for years.

Money and lending grew fast too. The total that firms and households had raised, through bank loans, bonds and shares, was growing by close to 14 per cent a year in 1989.

The Bank of Japan raised interest rates from May 1989

The Bank of Japan's discount rate, the interest rate at which it lent to banks, had been 2.5 per cent since February 1987. On 31 May 1989 the Bank raised it to 3.25 per cent, presenting the move as a step to keep prices stable. It raised the rate four more times, in October and December 1989 and in March and August 1990, when it reached 6 per cent.

In March 1990 the Ministry of Finance, which gave guidance to the banks, went further. It asked them to keep their lending to property firms growing more slowly than their lending as a whole, and to report their loans to property firms, builders and non-bank lenders, firms that lend money but take no deposits. The request was not legally binding. The Ministry's own history later judged that the request, together with the Bank's rate rises, helped stop the bubble growing.

Prices fell for years after their peaks

Share prices began to fall in the first days of January 1990. By about a month after the Bank's last rate rise, in August 1990, they had fallen to half their peak. The economy went on growing until February 1991, on the Economic Planning Agency's dating, but the Nikkei kept sliding, and in August 1992 it stood at ¥14,309.

Land prices turned later. They began to fall from around 1991 and kept falling through the decade. By 1999 the price of land for shops and offices in the six major cities was about 80 per cent below its peak of September 1990, on the Japan Real Estate Institute's index.

The losses on shares and land came to 159 per cent of GDP

Bank of Japan economists put the losses on shares and land in 1990 to 1993 at 159 per cent of GDP, smaller than the gains of 1986 to 1989. They put the gap largely down to a steady change of use: farmland and forest kept being turned into land for homes and businesses, and land put to those uses sells for far more, so the change kept adding to the value of Japan's land even while prices fell.

Why did share and land prices rise so far, and why did the Bank of Japan not act sooner? What did the fall leave behind for banks and for the wider economy? The next module takes these up.

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