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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



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