Asset Price Inflation and Economic Policies

Abstract

The Japanese economy experienced a remarkable economic growth during the latter half of the 1 980s. Almost simultaneouly, stock price and land prices showed extraordinary increases. The main purpose of this paper is to examine the nature of this asset price inflation and to analyze the re]ationship between that and real economic activities. This paper argues that the increase in asset prices during this period was caused mainly by speculative bubbles. Macroeconomic policies and flow of fund during this period had important effects on the growth of the bubble. In particular, monetary selaxation which was thought as necessary to prevent further appreciation of the Yen can be regarded as one of the most important factors which triggered the bubble. This paper casts doubts to the popular argument that the growth and collapse of the bubble were the main factors which caused fluctuations in the rea] economy. I. Asset Price Inflation in the 1980s II . Increase in Stock and Land Prices The Japanese economy recorded spectacular growth in the latter part of the 1980s. Overcoming the recession brought on by the sharp appreciation of the yen, it started to expand in December 1986 and went on to record the second-longest boom since World Wat II. Economic growth during this period was accompanied by an extraordinary leap in asset prices. The Nikkei average of 225 issues on the Tokyo Stock Exchange, the most conunonly cited indicator of stock prices, practically doubled from 8,800 in 1983 to 16,401 in 1986 (annual averages). The surge, which took the index to a peak of 26,646 on October 14, 1987, was temporarily halted by the Black Monday crash that hit the U.S. stock market at that point. But the slump in Japan was short-1ived. By April 1988 the market had climbed past the previous October's record high, and prices continued to climb rlght * I am grateful to Ms. Masami Seto for her assitance in translation. 1 1 2 HITOTSUBASHI JOURNAL OF EcoNoMlcs [December up to the closing session of 1989, when the Nikkei average hit 38,915. Stock prices were by this time more than four times the level they had been in 1983. The 1980s also saw an extraordinary surge in land prices. In 1986 Iand prices shot up throughout the metropolis, and the sharp rise continued in 1987. In fact, Tokyo land approximately tripled in price durlng these two years. The following years saw prices in the Tokyo area more or less level off, but meanwhile they had started rising in other regions of the country. Land in the Osaka area appreciated sharply in 1988 and 1989, and though it started a bit later, the Nagoya area experienced a similar rise. The escalation subsequently spread to resort areas and to major regional cities. Under normal circumstances, stock and land prices rise in line with growth in the economy and with dec]ines in interest rates. If the price of assets like stocks and land is based on economic fundamenta]s, then it should equal recurring net income divided by the interest rate. Let us assume here that such recurring income (such as stock dividends) is equivalent to a fixed percentage of GDP. In that case, the total value of assets should be equal to a fixed (or perhaps slowly changing) percentage of the value of GDP divided by the interest rate. The actual figures for this percentage are shown in the second two columns of Table 1. In the first half of 1980s, the figures were fairly steady for both stocks and land (though the stock figures show something of a rising trend and the land figures a falling trend). In other words, during this period both stock and land prices moved in keeping with the economic fundamentals. In the latter part of the decade, however, the figures for both stocks and land deviated greatly from the trend. This may be seen as evidence of the formation of a speculative bubble in the asset market. TABLE l. TRENDS IN GDP AND STOCK AND LAND ASSETS