What Happened to the Real Estate Market in Japan in early 1990s?

Introduction: Housing price bubbles appeared in many countries around the world in recent years. It is very important to know what were the reasons that behind these bubbles. In this whole posts, I start with the housing price bubble in Japan from 1980s to 1990s, and then turn into the current occurring housing price bubble in China. In post three, a comparison of similarities and differences between these two bubbles will be introduced. Lastly, I will state some reasons about why the housing bubble still exist in China and some factors that may burst the bubble in post four and five respectively.

Part one: Housing price bubble in Japan during 1980s and its monetary policy

It is widely known that the price of real estate and stocks inflated greatly in Japan in the early 1990s. Although it  has become history, knowing the reasons behind the formation, expansion, and the burst of the housing price bubble are extremely significant to remind us avoiding making similar mistakes. First, we begin with the formation housing price bubble in Japan from 1986 to 1989.

Formation of the housing price bubble (1985-1987)

Things started with the Plaza Agreement in September, 1985. In this agreement, five countries (USA, Japan, UK, France, and West Germany) announced simultaneously that they would get involved in the foreign exchange market because of the high USD exchange rate relative to other currencies. After this event, JPY began to appreciate relatively to USD. In the early 1987, Bank of Japan (BOJ) eased some monetary policies in order to counter this appreciation of Yen. However, these policies to some extent backed up the housing price bubble later.

Expansion of the housing price bubble (1987-1989)

There are mainly two reasons that may account for the expansion of the housing price bubble:

1. Monetary policy

The BOJ adopted monetary easing policy in 1987, and this monetary easing really reduced the cost of funding of investors, and the capital costs of issuance of new shares and bonds with warrants. Meantime, the BOJ down-regulated the official discount rate of the central bank from 5% to 2.5% and this decision aroused a dramatic increase in assets price, especially for real estates and stocks. There were two explanations for why down-regulation of discount rate lead to booming in assets price.

·    The first one is when the BOJ down-regulated the official discount rate, it actually encourages the commercial banks to make a loan from the BOJ and let them lend money to firms or individual investors. Firms and investors use these borrowing funds to invest in real estate and stock market, which definitely arouse a huge increase in demand of assets.

·   The second way is that as commercial banks loan more from the BOJ, more money were actually generated by the banking system, thereby increasing the supply of money. When government prints too much money, inflation emerges. During that particular time, inflation was very severe, so everyone wanted to invest in real assets to stop their fiat money from lossing value. This raised the demand of real estate even further.

The BOJ retained the low discount rate until May, 1989, which set a potential for the disaster later.

2. Taxation and regulations

During the expanding period, Japanese government imposed high tax on transacting land, but low tax on holding land. This tax policy leaded to a low land supply, and consequently, a high land price, which increased both price of houses and the collateral value of the land.

In this period, the housing bubble expanded rapidly due to these inadequate actions and reached its peak at the end of 1989. After that, the housing bubble formally started to burst dramatically.

Burst of the housing price bubble

 In 1989, Japanese government felt the pressure of the abnormal economy, so it increased the official discount rate 5 times from 2.5% to 6% within only few months. Meanwhile, the BOJ required all commercial banks cut their loans to the real estate companies. These two monetary policies significantly grew the costs of these real estate firms and also imposed great pressure for commercial banks to make profit by borrowing from the BOJ. At this time, the costs of both commercial banks and real estate firms were pretty high. Besides the cost factor above, another factor drove the burst of the bubble was that when bubbles formed, although the price in housing market remained at a very high level, the return on it was actually very small. At this point, it is not far away from the bubble bursting.


     At the end of 1989, the price of the asset market was too high to earn extra profits. Therefore, as the leaving of speculators and investors from these asset markets, the bubble of stock market firstly burst, followed by a large decline in land price. Finally, facing high costs on the one hand and depressed market on the other hand, many real estate firms bankrupt and the housing price bubble exploded.