VI Movements in Asset Prices Since the Mid-1980s
Author: Mr. Juha Kähkönen
Language:
English
Keywords:
OP; price; asset; saving rate; saving; equity price; stock price; price development; causes of asset price inflation; asset price change; Asset prices; Land prices; Consumption; Inflation; Stock markets
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Abstract

In the second half of the 1980s, Japan’s stock prices tripled, and land prices doubled. The surge in asset prices was followed by a collapse in stock prices starting in early 1990 and by a more gradual downturn in land prices from mid-1990 onward. This section analyzes the causes of the asset price fluctuations and the effects of the fluctuations on economic growth.

In the second half of the 1980s, Japan’s stock prices tripled, and land prices doubled. The surge in asset prices was followed by a collapse in stock prices starting in early 1990 and by a more gradual downturn in land prices from mid-1990 onward. This section analyzes the causes of the asset price fluctuations and the effects of the fluctuations on economic growth.

The sharp movements in Japanese asset prices since the mid-1980s have led many observers to conclude that there was a speculative “bubble”—a continuous market overvaluation followed by a collapse. The evidence discussed below suggests that, in addition to this, “fundamentals” also played a significant role. In part, the increase in the prices of real estate and equities reflected the growth in the economy: in the second half of the 1980s, real GDP increased by 25 percent, and corporate profits rose by 69 percent. Another part of the asset price inflation is attributable to easy monetary policy, which led to a decline in interest rates—ten-year bond yields fell from 6.3 percent in 1985 to 4.2 percent in 1987—and to a consequent ballooning of the present values of future profits and rents. A third (but difficult to quantify) contributing factor was excessive risk taking associated with changes in the financial environment. Distortions in Japan’s land tax system also accelerated the rise in asset prices. As regards the decline in asset prices since 1990, monetary tightening and measures designed to dampen the real estate market played key roles.

The swings in asset prices had a significant direct impact on economic growth, through wealth effects on consumption and through capital costs on investment. Estimates indicate that asset price increases boosted consumption by a cumulative 2-4 percent in the second half of the 1980s, whereas the impact on business fixed investment may have been as large as 10 percent. The downturn in asset prices since 1990 (which seems to have brought asset prices close to their trend levels) is estimated to have depressed real spending by roughly the same amounts in 1990–93. Besides the direct effects, asset prices have had indirect effects on the economy through money demand, bank profitability, and the financial system.

Developments Since the Mid-1980s

The dramatic rise in stock and land prices in the second half of the 1980s (Chart 6-1 and Table 6-1) was followed by a sharp decline in stock prices starting in early 1990 and a more moderate downturn in land prices from mid-1990 on. Although both stock and land prices had exhibited broad swings twice earlier in the postwar era (in the late 1950s and early 1970s), the strength of the recent asset price boom and the sharpness of the decline were unprecedented.

Chart 6-1.
Chart 6-1.

Movements in Asset Prices

Sources: Nikkei Telecom; and National Land Agency, Land Price Publication (Tokyo, various issues).
Table 6-1.

Asset Price Developments

(At end of year)

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Sources: Nikkei Telecom; and Japan, National Land Agency, Land Price Publication (Tokyo, various issues).

The Nikkei 225 stock price index rose at an annual average rate of 31 percent between end-1985 and end-1989 (Chart 6-2). During most of that period, the price-earnings ratio, which had averaged 21 during the first half of the decade, remained above 40. The first phase of the stock price boom saw the Nikkei 225 double from about 13,000 in December 1985 to the 26,000 range in October 1987. In the latter month, “Black Monday” reversed some of the increase, but, although the pace in most other stock markets leveled off, the Japanese stock market recovered quickly, and stock prices started climbing with fresh momentum. An all-time high in daily trading volume was recorded in July 1988, and the price index peaked on the last trading day of 1989, with the Nikkei 225 standing at almost 39,000. At that time, the market capitalization of the Tokyo Stock Exchange was $4.1 trillion (about 1.5 times Japan’s GDP), compared with $0.9 trillion (equivalent to 60 percent of GDP) at the end of 1985. The size of the Japanese equity market had already surpassed that of the United States in 1987, and at the end of 1989 the Tokyo Stock Exchange accounted for 41 percent of total world equities.1

Chart 6-2.
Chart 6-2.

Stock Price Developments

Source: Nikkei Telecom.

Land prices in Japan increased at an annual average rate of 13 percent between end-1985 and end-1990 (Chart 6-3). Compared with previous episodes of rapid land price increases, this boom had special features. First, it was unusually long, especially in comparison with the one in 1972–73. Second, in sharp contrast to the fairly uniform rises in land prices during earlier booms, there were large differences in land price increases with respect to location and land use. Although the price of land in Tokyo doubled in 1986–87 alone, land prices outside the major cities rose by only 38 percent over the entire five-year period. The surge in land prices started in the mixed commercial-residential districts of central Tokyo and rapidly spread to Tokyo’s residential areas. In 1988, when land prices in Tokyo started to stabilize, prices in Osaka and Nagoya, the other large metropolitan areas, accelerated. Land prices in the three metropolitan areas peaked at end-1990, when they were, on average, twice as high as in 1985. In all areas, commercial land increased in value faster than residential land, and the appreciation of industrial land lagged well behind both.

Chart 6-3.
Chart 6-3.

Land Price Developments

Sources: Nikkei Telecom; and National Land Agency, Land Price Publication (Tokyo, various issues).

The downturn in asset prices began in 1990. A collapse of the Nikkei 225 index by 3 percent on February 21, 1990 started a sharp declining trend in stock prices. By year’s end, the index had fallen by almost 40 percent from the peak, and the price-earnings ratio had declined to a level roughly in line with its trend level before the boom. The bottom in the stock price cycle was reached in August 1992, with the Nikkei 225 dipping briefly to about 14,000 (36 percent of the peak at the end of 1989). The Government’s announcement in August 1992 of an economic stimulus package, however, helped the stock market to recover, and the Nikkei 225 subsequently stabilized in the 16,000–18,000 range. In late March 1993, expectations of another stimulus package led to a sharp increase in stock prices. Following the announcement of the second package in April, the increase in stock prices continued, and the Nikkei 225 reached 21,000 points—a level first recorded in March 1987—in mid-May 1993. With the yen appreciating and the recession continuing, the stock price index declined during the remainder of 1993, falling to about 16,000 in November 1993 amid signs of a further deterioration in the economic outlook. In the first half of 1994, the Nikkei climbed to a range of 20,000–21,000, reflecting both the adoption of further economic stimulus measures and signs of a bottoming out of the recession.

The rise in land prices came to a halt in mid-1990. At the same time, the number of land transactions, which had risen dramatically during the boom, fell significantly.2 Land prices in large cities started to fall toward the end of 1990—modestly at first, but later at an increasing pace. At the end of 1992, land prices in the three metropolitan areas were 25 percent below their level at the end of 1990, and further declines were recorded in 1993 before prices started to stabilize in 1994. By contrast, the price of land outside the large cities has been relatively stable since 1990, and the decline in the price of land for industrial use has been small.

Causes of Asset Price Inflation and Deflation

Role of Fundamentals

Theoretically, the price of an asset (P) should equal the discounted present value of the expected earnings (E) on that asset. The discount factor is the rate of return on a risk-free asset (r) adjusted for the expected growth in earnings (g), taxes (t), and a risk premium (σ):

P=E/(r−g+t+σ).(6−1)

Thus, an increase in the price-earnings ratio of an asset could reflect one or more of the following factors: lower interest rates, improved prospects for earnings, lower taxation of the asset, and a reduced risk premium. Although arbitrage usually keeps actual asset prices at or near theoretical values determined by the fundamentals, there can be periods of speculative bubbles when market participants rationalize their purchases with the view that assets can be sold to someone else at an even higher price.

Much of the Japanese asset price inflation and deflation since 1985 can be explained by movements in the fundamentals (Chart 6-4). These movements reflect both policy actions and exogenous influences. First, interest rates have fluctuated widely, suggesting that monetary policy influenced movements in asset prices. In the second half of the 1980s, interest rates declined to historically low levels, reflecting a substantial easing of monetary policy. To counter the deflationary impact of the sharp appreciation of the yen after the Plaza accord in September 1985, the official discount rate was halved from 5 percent to 2.5 percent—the lowest rate ever—between January 1986 and February 1987. Long-term interest rates also fell, albeit not as sharply. Although the Japanese economy started a strong recovery in 1987, the easy stance of monetary policy was maintained, as events following Black Monday in October 1987 (a worldwide collapse in the stock markets and a sharp depreciation of the U.S. dollar) led to a coordinated easing of monetary conditions in all major industrial countries. In addition, the authorities felt external pressure to reduce the current account surplus by expanding domestic demand.

Chart 6-4.
Chart 6-4.

Asset Prices and “Fundamentals”

Sources: Japan, Economic Planning Agency (EPA), Annual Report on National Accounts (Tokyo, 1993); and Bank of Japan, Short-Term Survey of Business Enterprises and Economic Statistics Monthly (Tokyo, various issues).

In the event, the official discount rate was not raised until May 1989; by August 1990, however, the rate had been increased several times to reach 6 percent. Long-term interest rates did not respond immediately, but by early 1990 they were back to levels before the boom. Many observers suggest that market expectations of a sharp rise in interest rates were the proximate cause for the February 21, 1990 collapse of the Tokyo Stock Exchange that marked the beginning of the sharp down-turn in stock prices. Prompted by signs of a recession in the Japanese economy, the official discount rate was lowered several times between July 1991 and September 1993, and at the end of 1994 it stood at 1.75 percent, with long-term rates at historically low levels.

Second, expectations of growth in earnings from assets are likely to have changed since the mid-1980s. After being almost stagnant in the first half of the 1980s, corporate profits increased by 69 percent in the second half of the decade, and this buoyancy could have created expectations of permanently higher growth opportunities and may have contributed to higher stock prices. Although rents increased no faster than nominal GDP, expectations of large capital gains are likely to have fueled land price increases. The second half of the 1980s also witnessed deregulation and structural changes in the Japanese economy (the latter in part reflecting the need for firms to adjust to a permanently stronger yen), which

may have created widespread optimism about the growth prospects of the economy.

Third, taxation had an impact on land prices. In Japan, land has traditionally been taxed more lightly than other assets, and this has contributed to Japanese land prices being among the highest in the world.3 The key distortionary features are low assessment of property and inheritance taxes (thus reducing the cost of holding land relative to other assets and making land the preferred asset for inheritance); high rates of capital gains tax (thus discouraging land sales); and lighter taxation of agricultural land (thus raising the price of nonagricultural land).4

Although distortionary land taxation can explain the high level of land prices in Japan, changes in the tax system are needed to explain land price movements. Since the mid-1980s, there indeed were such changes. One of them—an observed fall in the property tax assessment ratio—contributed to the surge in land prices.5 Most of them, however, represented attempts to curb land price increases. In 1987, the Government introduced a heavy surcharge on capital gains from short-term trading, with a view to reducing speculative transactions, and reduced the long-term holding period (subject to a lower rate) to promote the supply of land. In 1990, the Tax Advisory Commission submitted to the Prime Minister a report entitled “Basic Recommendations on the Ideal Frame-work of Land Taxation” (Japan (1990)), and some of the recommendations were included in the 1991 Land Tax Bill.6 The new Bill, which came into effect in fiscal years 1991 and 1992, was intended to improve efficiency and equity in land use by encouraging the transfer of land to residential uses and by putting downward pressure on real estate prices. A key change in the Bill was the introduction of a land value tax (a tax on land holdings), initially at a rate of 0.2 percent and since 1993 at a rate of 0.3 percent. Other changes included phased increases in the assessment ratios of property and inheritance taxes, a higher long-term capital gains tax, and removal of many special treatments of agricultural land.

Finally, some researchers have claimed that the risk premium on Japanese equities declined in the second half of the 1980s. In particular, Ueda (1990) estimated the premium to have fallen to about ½ of 1 percent in 1986–88 from an average of 5 percent during the preceding ten years. Possible reasons for the decline in the risk premium include a change in the distribution of wealth toward less risk-averse investors (such as large institutional investors) and an increase in the wealth of the average investor (which would tend to reduce the degree of relative risk aversion).

Changes in the Financial Environment

There is widespread agreement that, in addition to the standard fundamentals discussed above, changes in the financial environment in the 1980s contributed significantly to the sharp rise in asset prices.7 These changes were brought about by extensive financial liberalization and innovation, and they were evident in increased lending to real estate and in vigorous financial investment activities of households and nonfinancial corporations.

Japan had entered the 1980s with a tightly regulated financial system, but during the decade extensive reforms were instituted: controls on capital movements were dismantled; interest rates on deposits were deregulated; and markets were introduced for a number of new instruments (such as commercial paper, futures, and options). The deregulation went a long way toward enhancing competition and improving the efficiency of the financial system, but it also gave rise to two major developments that fueled asset price inflation in the late 1980s. First, bank and nonbank lending to the real estate sector increased sharply because of changes in the behavior of both lenders and borrowers. As large manufacturing corporations gained access to international capital markets and to an increasingly developed domestic securities market, their reliance on bank loans declined dramatically, making small and medium-sized enterprises and households primary customers of banks and releasing loanable funds to nonmanufacturing sectors, especially real estate. This shift led to an apparent increase in the riskiness of banks’ loan portfolios, but increased competition prevented lending rates from rising sufficiently to compensate for the higher risk. By end-1989, bank loans outstanding to real-estate-related activities had more than doubled in value since 1985 and accounted for almost one fourth of the banks’ total loan portfolio.8 During this period, nonbanks, which are more lightly regulated than banks, were even more aggressive than banks in financing real estate transactions. Second, the liberalized financial environment, together with the easy monetary conditions prevailing in the second half of the 1980s, gave nonfinancial corporations opportunities for financial arbitrage and improved credit availability for households. As a result, financial investment increased sharply and was to a significant extent channeled into the stock market, driving up equity prices.

Besides directly influencing asset prices, the financial markets also helped the increases in land and equity prices to reinforce each other. Higher land prices can be perceived by investors as an increase in the market value of firms, and this raises stock prices. Higher land prices also increase the value of land as a collateral, enabling landowners to obtain more bank loans. Some of the additional loans can be used for further land and equity purchases, which will further raise asset prices. Although this description does not establish the ultimate cause for the asset.price increases, it is suggestive of a multiplier process that works through the financial markets once one asset price starts to increase.

Throughout most of the bubble period, the Japanese authorities chose not to intervene in the financial markets. However, as part of a series of special measures to contain land prices (reforms in land taxation constituted the main part), the Government in April 1990 placed quantitative restrictions on bank lending to the real estate sector. Once the declining trend in land prices became apparent, these restrictions were lifted at the end of 1991. In May 1991, the Government also amended the legislation regulating the lending industry, with a view to strengthening restraints on nonbank lending for land-related purposes.

Was There a Bubble?

Practically all empirical studies attempting to explain Japanese asset price movements since the mid-1980s have concluded that there was a speculative bubble; that is, fundamentals alone are unable to explain the sharp increases in the second half of the 1980s and the subsequent collapse.9 These studies typically have estimated an equation such as equation (6-1) using data from the period before the bubble and have compared predictions for the postsample with actual developments. To shed light on the relative importance of various fundamentals and the possible existence of a bubble, the next few paragraphs describe the results of two simple exercises.

First, an error-correction equation was estimated for stock prices using quarterly data from 1981 to 1985, with corporate profits and long-term interest rates as dependent variables (data on risk premiums and taxes on equity holdings were not readily available):

Δ⁢log⁡(PEQ/PROFT)=0.22−0.03Δ(RLB−PROFT%)(3.4)(2.4)−0.06(RLB−PROFT%)−1(3.3)+0.49Δ⁢log⁡(PEQ/PROFT)−1(2.3)−0.36log(PEQ/PROFT)−1(3.1)⁡(6−2)R2=0.49DW=1.88h=0.44,

where

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and the numbers in parentheses are t-statistics. Note that this equation implies a long-run elasticity of stock prices with respect to the interest rate of—⅙. Thus, a 1 percentage point drop in the long-run interest rate should lead to a permanent 17 percent increase in stock prices.

Equation (6-2), which explains stock price movements in the period before the bubble reasonably well, was then used to predict developments from 1986 on (Chart 6-5). Several conclusions emerge. First, if interest rates had remained at their 1985 levels and expected profits had grown at the historical trend rate, stock prices would have risen at an annual rate of 6 percent—far below the actual rate observed during the bubble period. Second, the simulations imply that monetary policy contributed more to the collapse in stock prices than it did to the long rise of those prices: although the contribution of lower interest rates to the boom in stock prices in 1986–89 is estimated at 15 percent, higher interest rates accounted for as much as 45 percent of the sharp decline in equity prices in 1990.10 Furthermore, lower interest rates since mid-1991 helped to keep stock prices from falling even more rapidly than they actually did. Third, albeit difficult to measure, changed expectations about corporate profit growth could potentially explain a major part of the boom and the collapse in stock prices. The black line in the middle panel of Chart 6-5 indicates how much the expected growth rate of corporate profits would have had to differ from the historical trend in order to fully explain actual movements in stock prices. As can be seen from the chart, the rise in stock prices in 1986—89 would have been consistent with an increase in the expected profit growth rate from 6 percent to almost 10 percent—not an unreasonably large change, given the underlying growth rate of actual profits at the time and the increase in the share of profits in GDP. Part of the increase in corporate profits was cyclical, however, and should not have affected a rational investor’s valuation of equity. Hence, the possibility of a bubble cannot be excluded.

Chart 6-5.
Chart 6-5.

Actual and Predicted Stock Prices

Sources: Nikkei Telecom; and IMF staff estimates.

A similar exercise was carried out for land prices. With potential GDP growth used as a proxy for the expected increase in real rents, the estimated equation took the following form (the data were from the period 1970–85):

Δ⁢log⁡(PLAND/YT)=−0.40−0.0044(RLB−PEXP−QT%)(2.2)(1.7)+0.61Δ⁢log⁡(PLAND/YT)−1(5.7)−0.051log⁡(PLAND/YT)−1(2.2)(6−3)R2=0.41DW=1.90h=−0.89,

where

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Equation (6-3) implies a long-run interest rate elasticity of land prices of—0.12, similar to that estimated for stock prices.

Dynamic simulations over the period 1986–92 suggest the following conclusions (Chart 6-6). First, as in the case of stock prices, easy monetary policy (low interest rates) explains about 15 percent of the increase in land prices (over and above the estimated trend increase of 8½ percent) during 1986–89. Tighter monetary policy in 1989–90 helped to bring land prices down, but the fall in land prices continued unabated in 1991–92 despite an easing of monetary conditions. Second, the simulations do not suggest a significant role for changed expectations about rent growth, leaving the bulk of the land price increase in the second half of the 1980s unexplained (see Chart 6-6). Although this could simply reflect a low correlation of potential GDP growth with the difficultto-measure expectations about growth in earnings from land, it could not signal the existence of a bubble.

Chart 6-6.
Chart 6-6.

Actual and Predicted Land Prices

Sources: Nikkei Telecom; and IMF staff estimates.

Note that the two simple exercises undertaken above both suggest that equity and land prices may have returned close to their trend levels in 1992: in Charts 6-5 and 6-6, the lines indicating the underlying trend growth based on experience before the bubble cross the lines representing actual developments. There are, however, factors not included in the estimated models that may suggest otherwise. In particular, the changes in land taxation contained in the 1991 Land Tax Bill may have made the decline in land prices deeper and longer-lasting than equation (6-3) would imply. This could explain why land prices have continued to fall while stock prices have started to recover.

Impact of Asset Price Movements on the Economy

Even though the reasons for the sharp fluctuations of asset prices may not be completely understood, there is little doubt that these fluctuations contributed to the long boom in the Japanese economy that began in 1986 and to the recession that started in 1991. This part of the section discusses the effects of asset prices on economic growth, mainly through private consumption and investment, which contributed 2½ percentage points and 2¾ percentage points, respectively, to the average GDP growth of 5 percent in 1987–90.

The wide fluctuations in asset prices had a direct impact on consumption expenditure through the wealth effect. Household net worth increased sharply in the second half of the 1980s, from the equivalent of 5½ times annual household disposable income at end-1985 to almost 8¾ times such income by end-1989 (Chart 6-7 and Table 6-2). Capital gains on land holdings (which account for about half of total household assets) were responsible for 70 percent of the rise in net wealth over this period, with stock holdings (less than 10 percent of the total) accounting for another 13 percent. Following a turn-around in asset prices, the household net worth position deteriorated in 1990 as a ratio of disposable income and, in 1991, also in absolute terms. Although comprehensive data are not available, net worth is estimated to have fallen further by some 5 percent in 1992, with the ratio of net worth to household income estimated to have dipped to below the 1987 level.

Chart 6-7.
Chart 6-7.

Household Saving and Net Wealths1

(In percent of disposable income)

Sources: Japan, EPA, Annual Report on National Accounts (Tokyo, 1992); and IMF staff estimates.1 Shaded areas indicate recessions as defined by the EPA.
Table 6-2.

Consolidated Balance Sheet of Household Sector

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Source: Japan, Economic Planning Agency (EPA), Annual Report on National Accounts (Tokyo, 1993).

IMF staff estimates based on land and stock price developments.

Compared with the sharp swings in asset prices, the direct effect on consumption appears to be relatively small. Estimates of the positive effect during the upswing typically range between ⅓ of 1 percentage point and 1 percentage point a year; on the same basis, the decline in asset prices in 1991–92 is estimated to have resulted in an annual decline in consumption of¼to ¾ of 1 percentage point.11 The low estimates are obtained by applying typical estimates of the propensity to consume out of wealth (ranging from 0.03 in MULTIMOD, the IMF’s multicountry macroeconometric model, to 0.06 in Japan (1992)) to changes in real financial wealth (which accounts for slightly over one third of total household wealth in Japan). The high estimates are based on movements in total wealth, including land. Most studies have argued (and found empirically) that land holdings have little or no effect on consumption in Japan: landowning households may not regard unrealized capital gains fully as changes in their real wealth, and consumers without land will have to increase their saving to obtain financing for costlier housing. An exception is a study by Dekle (1990), which used time-series and panel data for Japanese prefectures and concluded that the rise in land prices did have a positive effect on consumption, since the increased consumption of homeowners was larger than the decreased consumption of renters. Thus, the highend estimates mentioned above cannot be dismissed as implausible. Nevertheless, it is clear that changes in disposable income rather than swings in asset prices have accounted for the bulk of the growth in consumption since the mid-1980s.

The second half of the 1980s also saw a boom in business fixed investment, to which asset prices contributed by lowering capital costs and increasing the firms’ net worth that could be used as collateral. Between 1986 and 1990, business fixed investment rose by 55 percent. Rapidly rising equity prices enabled large companies to shift from bank loans to issuing new stocks and equity-linked bonds at very low interest rates; buyers accepted the low rates because of the anticipation that the bonds could be converted into equities at favorable prices. Surging land prices in turn improved the capacity of small and medium-sized firms to raise bank loans with land as collateral.12 For the nonfinancial corporate sector as a whole, leverage (debt-to-equity ratio) fell sharply, and liquidity rose along with capital spending, contrary to historical experience in Japan and the experience of many other industrial countries (Table 6-3).

Table 6-3.

Consolidated Balance Sheet of Nonfinancial incorporated Enterprises

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Source: Japan, EPA, Annual Report on National Accounts (Tokyo, 1993).

With the decline in asset prices since 1990, there have been reverse effects on capital spending. Capital costs have risen. The collapse of stock prices has made it difficult for firms to raise new capital through equity issuance, and outstanding issues of equity-linked bonds are being redeemed. These developments have led large companies to return to bank loans and straight-bond issues, at a significantly higher cost than in the late 1980s. For small and medium-sized companies, the erosion of collateral land values has reduced borrowing opportunities, and the liquidity position of the entire nonfinancial business sector has declined to a level that prevailed in the early 1980s. The debt-equity ratio, which at the end of 1989 was only one third of its 1985 level, almost doubled in 1990–91 and is tentatively estimated to have returned to the pre-bubble level in 1992. The business sector’s current financial difficulties and their impact on capital spending should not, however, be exaggerated. Although the financial position of firms has declined sharply over the past two to three years, this represents more a return to a normal situation following overheating than a plunge to historical lows.

In contrast to consumption, there are few representative estimates of the impact of asset price movements on business fixed investment, in part because of the difficulty of measuring capital costs and separating the effect of asset price changes from that of changes in monetary conditions. MULTIMOD simulations suggest that a 1,000 point rise in the Nikkei 225 index would result in an increase of ½ of 1 percent to 1 percent in business fixed investment over two years. This implies that the surge in equity prices in 1986—89 raised investment cumulatively by almost 10 percent over 1987–90, accounting for one third of the acceleration in the growth of investment. On the same basis, the decline in equity prices in 1990–92, which brought the Nikkei 225 to below its level of the end of 1985, is estimated to have depressed investment by a cumulative 10 percent over 1991–93.

Residential investment increased by almost 50 percent during the early part of the boom before stabilizing in 1989. Although the boom in housing construction was driven by many of the same factors that caused the asset price inflation—low interest rates in particular—asset prices had an independent influence on residential investment through two channels. Besides the wealth effect, which tended to raise the demand for housing construction during the boom, higher land prices contained the demand for housing by households that did not own land and stimulated the supply of land for construction by owners of surplus land, making the impact of higher land prices on residential investment ambiguous. As in the case of business fixed investment, there are few empirical estimates. There is, however, some evidence that higher land prices had a differential impact on various types of residential investment: negative for owner-occupied housing, and positive for rental housing in Tokyo (Japan (1992, pp. 46-56)). All in all, the surge in asset prices does not appear to have been the driving force behind the boom in residential construction. Similarly, the collapse of land and equity prices is unlikely to have been the main contributing factor in the decline in residential construction in 1991–92.

References

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1

Note, however, that in Japan cross-ownership of equity shares is more common than in other major countries. French and Poterba (1991) estimated that in the second half of the 1980s intercorporate equity holdings accounted for about half of the total market value of Japanese stocks, compared with 2 percent in the United States. Excluding cross-holdings, the market capitalization of Japanese stocks was about two thirds of that in the United States, and about 25 percent of the world total, at the end of 1989.

2

If the tax revenue from real estate acquisition (adjusted for the increase in the assessment value of the tax base) is taken as an indicator, land transactions fell by 11 percent in 1990 and by 6 percent in 1991.

3

See Ishi (1991) and Takagi (1989) for descriptions of land taxation in Japan, and Sachs and Boone (1988) and Ito (1992, pp. 408–14) for international comparisons.

4

An econometric study by Ando and others (1989) concluded that taxing farmland at the same rate as land for housing would be a highly effective means of raising the supply of land for residential uses and lowering land prices.

5

Ishi (1991) estimated that, whereas in the early 1980s property tax assessment was on average two thirds of the official valuation (which in turn is estimated to be only 70-80 percent of the market price), by 1988 the ratio had declined to about one half and by 1991 to slightly over one third.

6

For details of the land tax reform, see Organization for Economic Cooperation and Development (1991, pp. 153–54).

7

See Japan (1993) for a detailed discussion of the impact of the changed financial environment on asset price inflation.

8

This estimate includes bank loans to nonbanks for real-estate-related purposes.

9

As regards stock prices, representative studies include Bank of Japan (1993), French and Poterba (1991), Hardouvelis (1988), Hoshi and Kashyap (1990), Ogawa (1993), and Ueda (1990). For land prices, recent studies include Japan (1992), Japan (1993), and the Japan Economic Research Center (1993).

10

Nevertheless, below-trend interest rates (easy monetary policy) had a significant direct impact on the rise in stock prices in 1986–89: the equation suggests that in the peak year 1989 stock prices were 20 percent higher than they would have been had interest rates remained at levels recorded before the bubble.

11

Real private consumption grew at an average annual rate of 5½ percent during 1987–90 and4¼percent during 1991–92.

12

Ogawa (1993) has discussed recent literature that implies a positive relationship between the collateral value of the firm and the level of investment. His empirical work found evidence supporting this hypothesis.

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Cover Saving Behavior and the Asset Price "Bubble" in Japan
Saving Behavior and the Asset Price "Bubble" in Japan
Analytical Studies
Author: Mr. Guy M Meredith and Mr. Ulrich Baumgartner
ISBN:
9781557754622
ISSN:
0251-6365
Publication Date:
21 Apr 1995
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781557754622.084
Pages:
86

Movements in Asset Prices

Stock Price Developments

Land Price Developments

Asset Prices and “Fundamentals”

Actual and Predicted Stock Prices

Actual and Predicted Land Prices

Household Saving and Net Wealths1

(In percent of disposable income)