Japan's Land Bubble of the 1980's

Land prices only went up. Till they didn't.

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Saga a small Japanese city, boasting a population of 850,000 people is a 14-hour drive from Tokyo. Construction was abundant here during Japan’s Lost Decade from 1991-2001, as the country sought to fend off recession. It did so by unleashing a huge public works drive across the length and breadth of the country, the cost for which even toppled entire military budget of the United States in some years.

The signs of this infrastructure binge are visible in Saga - a new airport, a 200-acre landscaped park with a shiny visitor center and 100 historical buildings all interconnected with empty roads. At the peak of the building frenzy, one in nine workers in Saga worked in construction.

The construction was Japan’s desperate effort to stave off recession. A recession that was the result of the bursting of Japan’s land and stock market bubble.

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Post World War II Boom

Japan’s economic rise post World War Two can be credited to the economic reforms undertaken by the government supported by a well-educated workforce. Observing the financial progress made by the United States in the nineteenth century, Japan was quick to adopt capitalist practices and institutions.

Domestic as well as international competition drove Japanese companies to create new product designs as well as innovative production techniques. This competitive streak drove the adoption of modern software at manufacturing plants. Resulting boosts in efficiency allowed them to ramp up production as well as product cycles. Through rigorous management it led to improvements in quality control and lean production systems- practices Japan is still famous for.

Japanese companies’ profits soared between 1978 and 1983 for example, annual profits of Matsushita Electric Industrial rose by more than 60% from ¥116 billion to ¥195 billion; those of Toyota doubled from ¥202 billion to ¥415 billion and profits of both Fujitsu and Toshiba quintupled—in just five years.  

The Japanese government, meanwhile, acted as a business adjunct and referee, steered large companies into promising sectors by providing tax breaks, cheap credit, subsidies and “administrative guidance”. A variety of other policies assisted and protected companies, including trade barriers and an exchange rate that discouraged imports and promoted exports.

Japan’s output shifted with world currents, and its industrial expansion made it a world leader in shipbuilding, electronics, steel, automobiles, and high technology. Japan reported a record trade surplus with the United States in 1981 of $13.4 billion, with overall exports soaring 17.2% earning $152.1 billion.

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The Plaza Accord Effect

Given the trade imbalance between the two countries, The Plaza Accord of 1985 was signed with the intention of depreciating the US dollar relative to the Japanese yen. By weakening the USD, American exports would be cheaper while Japanese imports comparatively more expensive. Along with manipulating foreign exchange rates, Japan agreed to loosen monetary policy - to boost demand for domestic and American goods.

Keeping its word with the agreement, Japan lowered its interest rate fueling large-scale borrowing and simultaneously growing the money stock by 10.5% every year between 1986 and 1990. The liquidity which was intended to boost demand was diverted into land speculation. With cheap credit and little regulatory oversight, the housing market in Japan reached an all-time high. Unique to Japan’s property boom was the fact that corporations were large participants in this land speculation.

The “average” Tokyo square meter that cost ¥1 million in January 1986 doubled in value in two years. And that was just the average. Even small condominium units, 68 meters square, sold for 10 years of the average salaried worker’s annual gross pay. First-time buyers would have to contract 50- to 90-year mortgages to make the payments, even at Japan’s relatively low interest rates.

It was widely speculated that-

The property that housed the Imperial Palace in downtown Tokyo was worth (no one knew for sure because it wasn’t really for sale) as much as the entire state of California.

The increase in land prices eventually bolstered even regular citizens to begin believing the boom would never end and buy homes that they could scarcely afford through exotic structures. Families even took out multi-generational loans to ensure they didn’t miss out.

Photo by Alfred Kenneally on Unsplash

The reason land prices skyrocketed were two-fold- lax government oversight and banks eagerness to lend.

The banks were eager to lend as they were bolstered by the flood of money released by the Ministry of Finance because of the Plaza Accord. Exotic loans were first marketed to large corporations and then to medium and small companies to encourage borrowing beyond their balance sheets. The excess liquidity encouraged many companies to engage in financial engineering by investing in real estate, straying from their core business. Such speculative bets chased returns in the real estate market with a nudge from the government.

The favorable government attitude: little land regulation, low tax rates and loophole-ridden tax laws on capital gains from land, low interest rates and artificially mandated credit ratings allowed major players, such as trading companies, and minor ones, such as real estate agencies, to raise speculative capital easily at low cost, no matter how high the debt-to-equity ratio on any corporation’s books.

The land bubble enabled the dazzling stock market rise.

The banks eager to participate in the land price boom lent against quickly inflating land as collateral, at 80% or more of “fair market value.” Japanese banks and other big lenders such as insurance companies were transformed into fountainheads of corporate credit that grew along with the speculative value of the land—whether sold or unsold.

This led to the spectacular rise of the Nikkei stock exchange. In the span of a decade it quadrupled- from ~6,600 in January of 1980 to its peak of ~38,800 in December 1989.

Land prices in downtown Tokyo had a similar acceleration - 10.4% in 1986, 57.5% in 1987, 22.6% in 1988.

The Japanese land and stock markets were caught lockstep with each other. A rise in land prices fueled a rise in stock prices. Enabling corporations to borrow more to further invest in land while using their stocks as collateral for the same. With limited land to buy it led to further increase in prices with the cycle starting all over again.

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Caught off guard the Bank of Japan moved aggressively by raising interest rates to stop speculation on land prices. As liquidity suddenly dried up the bubble began to implode. Both markets spiraled downward as investors sold stocks to cover losses in the land market, and vice versa, plunging land and stock prices from which Japan has still not recovered.

As property prices dropped in Japan, homeowners found themselves saddled with loans far larger than the value of their real estate. Many fell into bankruptcy, especially those who lost their jobs or took pay cuts as declining property prices helped to incite a broader recession. From 1994 to 2003, the number of personal bankruptcies rose sixfold, to a record high of 242,357.

For decades after the real estate bubble burst, successive Japanese governments tried to resuscitate the market and other parts of the economy with expensive public works projects, but the projects did not make financial sense and only succeeded in inflating the national debt.

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With the wind sucked out of its sails the Japanese economy has trundled along till today. ‘Abenomics’ has barely led to the kind of growth that the Japanese population have hoped for.

So, the next time you visit Tokyo and are impressed with all its tall buildings remember Saga, the small city of 850,000 people having roads going to nowhere.

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