Bubble economy 1724 Essay Example

bubble economy. The profitability associated with land speculation activities made them widely popular. As speculative transactions in assets kept growing, it created a belief that this trend would continue for a considerable duration. A significant factor contributing to this was the substantial investment.

The surge in risky activities can be ascribed to the success of the Japanese in the global market during the 70s and 80s. Many Japanese businesses and entrepreneurs amassed significant wealth and had substantial equity for investment. Some of these individuals focused on high-risk assets such as stocks and land, leading to neglect of regular ventures. A key factor contributing to extensive transactions in the land market was the willingness of banks to lend large sums of money. Financial institutions in Japan were proactive in providing loans to enterprises, making it easier for them to access the speculative land market.

In contrast to North America, where mortgage size is typically determined by the borrower's income stream, Japanese financial institutions calculated mortgage size based on collateral (the house). Consequently, borrowers in Japan could secure larger loans compared to their counterparts in North America. Additionally, approximately 62% of Japanese households owned their homes with an average value of around 4 million yen, creating a vast pool of potential investors. During this speculative period, borrowers increased the value of their loans as the worth of their collateral escalated.The high liquidity of assets attracted a significant number of potential speculators, allowing both common homeowners and large enterprises to engage in speculative activities. Additionally, the involvement of both banks and investors in land speculation likely contributed to the large loan sizes and subsequently led to a banking scandal. Financial

institutions would receive "key money," a form of bribery, from investors seeking larger loans, causing many institutions to become overextended with loans during this period.

Another method for generating cash flow in the speculative market involved dividing a loan acquired from a major financial institution among specific enterprises. These intermediate companies would then lend portions of this loan to individuals who were ineligible for bank loans. As a result, these intermediaries earned interest on these smaller loans, creating a branching effect that allowed easy access to the speculative market for various types of companies and society.

Not only did large corporations and construction firms participate in land speculation, but even organized crime groups and religious temples were also involved. Another factor that encouraged speculation was the initial reduction of capital gains tax by the government (specifically the Liberal Democratic Party) in the early 1980s. This reduction made reselling land highly profitable for owners.

Government policy flaws indirectly enable investors to avoid property tax expenses. For instance, certain landowners may cultivate small crops on valuable empty urban land and classify it as agricultural land, resulting in minimal taxation. Consequently, the increase in land speculation can be attributed to excessive loans, easy access to the speculative market, and the government's indirect flaws.

During the peak of land speculation in Japan, a study highlighted the extraordinary land prices. It was claimed that selling Tokyo's property alone could afford the entire United States, and selling the surrounding Imperial Palace land could purchase Canada. While this may have been an exaggeration, it underscored the significantly higher land values in Japan compared to North America. However, land speculation also gave rise to various social problems

in Japan.

Firstly, it resulted in a substantial increase in rent and housing costs, making it impossible for many young couples and low-income families to establish their own households. The average cost of a house in Tokyo rose to around 500 million yen, rendering it unaffordable for both younger individuals with limited incomes and middle-aged workers. This was primarily due to loan repayments consuming at least three-fifths of their earnings.

Additionally, those with smaller down payments might not have sufficient working years left to fully repay their mortgages before retirement. With longer amortization periods came larger interest burdens as well. Consequently, white-collar workers found themselves enslaved by perpetual mortgage payments and soaring housing expenses.

These circumstances had implications for Japan's population growth too;in 1990, only 1.2 million births were recorded – the lowest number since 1893.According to several analysts, the high cost of housing in Japan is seen as a contributing factor to the country's slow population growth. This decline in population and scarcity of large families has resulted in a significant social problem within present-day Japanese society. The consequences are diverse and include not only expensive housing but also elevated crime rates and an uptick in suicides among police officers.

(1) - Wood, "The Bubble Economy", Sidgwick ; Jackson, London 1992 pg. 50

Many police officers find themselves breaking the law because they have a lot of debt. In order to address financial concerns in Japan's real estate market, the "2 generations mortgage plan" was established. This plan specifically targets white-collar workers and was introduced in 1983, becoming even more advantageous after 1985. To participate in this program, individuals must be part of a father-son duo or already living

together, with the son being over 20 years old and responsible for repaying the loan by age 70. The size of the mortgage is determined by the borrower and has flexible interest rates. Additionally, applicants must purchase life insurance from the bank to protect against uncollectible debts resulting from death. Couples can also take part in this initiative. Banks suggest that repayment can be completed within a span of 40 years while also strengthening bonds between fathers and sons. However, there are drawbacks to this program as well. Although it allows regular income workers to become homeowners, they will carry their debt throughout their lives and pass it on to future generations. Furthermore, these individuals may face limitations on spending for other goods due to high land prices that discourage work incentives.During the period of wealth accumulation in Japan, particularly when individuals inherited or owned land in metropolitan Tokyo, their net worth suddenly increased to ?250 million to ?300 million. This amount was equivalent to both lifetime earnings and retirement pension for an honest individual. As a result, the middle-class population also grew substantially. However, some people began to believe that they had achieved a comfortable life and lost their motivation to work hard and progress. This distortion of the social structure poses various problems for the government, especially regarding taxation.

Additionally, owning a home in Japan came with high costs and sacrifices, leading many Japanese people to prefer renting instead. The demand for rental properties increased significantly, attracting numerous investors and speculators who caused land prices to rise. Consequently, young couples, low-income groups, and elderly individuals (who make up a significant portion of Japan's tenant

population) face difficulties due to these rising prices.

Property owners during this time were eager to sell their assets at higher returns and intentionally increased rents to force tenants out. This strategy allowed them either to select more desirable tenants or sell the property again for greater profits. Unfortunately, many elderly individuals couldn't afford such steep rent increases."

(2) - Wood, "The Bubble Economy", Sidgwick & Jackson, London 1992 pg. 61

The increase in housing prices has led to many people being forced to relocate and becoming homeless. In some cases, property owners hired organized gangs to forcibly evict reluctant tenants. Unfortunately, these tenants lost hope of owning a home in the central area and had to move farther away from the city center. Consequently, they now endure long commutes of over 2 to 3 hours from their new locations to work. Both homeowners and tenants have suffered due to the rise in housing prices. This issue is not limited to the local population; even foreign students are affected by the problem. According to a 1986 statistic, out of a total of 8116 foreign students, only 17% lived in suitable residential facilities. The high cost of rent, unfavorable exchange rates, and reluctance of local landlords contribute to this situation for foreign students. Student associations suggested constructing new residential housing; however, intense land speculation and high construction costs make it very expensive. Therefore, with this new construction, rent is likely to increase by 2 or 3 times. The Japanese government has made little effort in addressing this housing issue for both groups despite expecting an influx of 100,000 new foreign students entering Japan in the future century (21st century).Both

the local population and foreign students lack awareness and fail to take action.

Foreign ambassadors, particularly those from lower-income countries such as Africa or Uganda, are impacted by the escalating land prices in Tokyo. The rising costs compel them to move their offices away from Tokyo due to unaffordable rent. This matter has been raised with the Japanese government but is still unresolved. Furthermore, land speculation also results in a scarcity of new residential development in areas like Thousand Leaf City that offer spacious plains and playgrounds resembling conventional residential zones.

(3) - In his book "The Life of Foreign Student in Japan", Cao Man Kit explores the experiences of foreign students living in Japan. The book was published by Ming Chang in H.K. in 1991 and can be found on page 160.

(4) - According to Cao Man Kit's book "The Life of Foreign Student in Japan" (Ming Chang, H.K. 1991, pg. 167),

One of the Japanese newspapers features an advertisement discussing their prediction for the living conditions of Japanese individuals in the 21st century. The article suggests that husbands should not return home until the weekend and instead live in a worker's residence near their workplace during the weekdays. This residence should resemble a hotel, providing services such as laundry facilities, postal services, and messaging. Furthermore, it is recommended that their actual home be located in a rural or less urban area, around 100 km away from their workplace. This development reflects not only the impact of rising land values on housing affordability but also how it distorts the lifestyle of Japanese workers, which can be seen in previous incidents such as the two generations mortgage.

During the

period of economic prosperity known as the bubble economy, zoning regulations in Tokyo were revised to allow builders to allocate more capital on a given piece of land. This indirectly increased the potential for building space in Tokyo, resulting in a subsequent rise in real estate values, property taxes, and traffic congestion levels in the area.

According to statistics from the National Land Agency, approximately half of the firms surveyed in the mid to late 1980s claimed to have no development plans for the land they acquired. Rather than constructing homes or apartments, these firms focused on building office buildings that could generate steady revenues. From a developer's perspective, houses and apartments were considered the least profitable projects, thus rarely allocating land for such purposes.Due to land speculation and a shortage of new housing construction, Japanese residents are struggling to find affordable homes close to their workplaces. In the recent Japanese election, voter participation dropped below 60% of the total population, and the liberal democratic party did not secure 50% of the seats. This was the lowest voter turnout since WWII and stems from the lack of faith in the liberal democratic party's ability to lead Japan out of recession. Additionally, their ineffective control system during the bubble economy and failure to implement successful recovery programs have contributed to this lack of trust. Despite initiatives such as expanding public investment and lowering interest rates, the yen remains high, discouraging exports. Specifically, during the bubble economy, the government failed to propose appropriate measures.

The given text is a citation from a book titled "The Strategic of Japan Enterprise" by Cao Man Kit, published in 1992 by Ming Chang

in Hong Kong. The citation is on page 68.

(6) Charles Mc Millian, "The Japan Industrial System", Berlin, New York, 1996, pg. 56

(7) Wood, "The Bubble Economy", Sidgwick & Jackson, London 1992 pg. 89

An effective tax law, known as the National Land Value Tax, was in place until 1990. This tax levied prohibitive rates on profits from the sale or transfer of land and was established under the national land law in 1974. Additionally, during 1990, another official policy was implemented to regulate loan activity in the financial market. This policy resulted in a significant slowdown of loan activities, particularly in 1991. However, the government's response to the housing cost crisis, which had already burdened individuals for five years, was notably lacking. Furthermore, during the bubble economy period, many politicians were either engaged in land speculation themselves or were bribed by organized crime groups and large enterprises. These unsavory actions were conducted to secure more favorable benefits in the land market. One specific incident involved a businessman named Kyowa and a cabinet minister named Fumio Abe. In exchange for a payment of 480 million yen, Abe disclosed details about a new road construction project in Hokkaido. The revelation of such political scandals occurred shortly after the burst of the bubble economy. Lastly, it is worth noting that a significant portion of politicians' assets were invested in the real estate market. As a result, both banks and government officials were unwilling to acknowledge the decline in land prices. When this scandal was exposed to the public, land prices plummeted by approximately 50%. This sharp decline was primarily due to attempts made to conceal the truth for an

extended period of time. Consequently, many investors, both large and small, abruptly faced the harsh reality after awakening from their optimistic dreams.The government's loss of trust among many Japanese has had an impact on the image of the strong liberal democratic. During the bubble splash period, the inability of pre-graduates and graduated university students to find jobs in the labor market due to the diet all companies has left many students frustrated about their future. This has resulted in a distorted supply of the labor market caused by the bubble burst. Therefore, it is evident that land speculation activities have created numerous social problems in Japanese society both during and after the bubble burst.

During the bubble period, the economy experienced a significant boost due to the sudden rise of land value and stock market. However, the aftermath of the bubble burst was a distressing period for the economy. In general, we will examine the effects on the rise and fall of Japan's economy.

In 1985, the Japanese government declared that they needed to adjust the trade balance and grow their economy in order to prevent a recession during this adjustment period. As a result, in 1989, the GNP increased by 481 trillion yen, largely due to speculation in the market where people put their profits from land into the stock market and vice versa. Many companies focused primarily on this speculative market.

During this time, the Tokyo Stock Exchange reached almost 40,000 points, with the value of stocks and land far exceeding their real value. The increase in property value was not due to demand but rather speculation. When the bubble burst, the vacancy rate skyrocketed

due to a lack of demand. Many companies had to drastically cut their expenditures on entertainment, advertising, communications, and more in order to survive. This overall scenario depicts the happenings during the bubble economy.

During the golden period of land speculation, investors were aware that the land market in Japan was limited due to its potential and limited geographic area. Consequently, they began purchasing land overseas in Hawaii. Specifically, in 1987, non-waterfront housing prices in Hawaii increased by 51% and waterfront housing prices rose by over 100%. This resale land market in Hawaii was primarily dominated by the Japanese investors.In 1987, land prices in Japan saw an estimated increase of over 60.2%. This sudden rise in rent made it unaffordable for many tenants, leaving them with no place to stay, especially the elderly. The reasons why Japanese investors wanted to invest in Hawaii are manifold. Firstly, the waterfront view in Hawaii reminds them of Japan, making it an attractive vacation and retirement destination. Additionally, the proximity of Hawaii to Japan (only a 3-hour plane ride) and the advantageous exchange rate have significantly increased the value of their equity, providing further encouragement for investment. Consequently, the wave of land speculation not only distorted the land market in Japan but also had an impact on foreign countries.

The information from Iwami Toru's book "Japan in International Financial System" (MacMillian Press, New York 1995, pg. 135) is found in paragraph (8).The book "Japan in International Financial System" by Iwami Toru, published in 1995 by MacMillian Press, discusses Japan's role in the international financial system. Page 135 contains relevant information on this topic.

(10) Kenneth V. Smith, "Inman News", June 1996 Version,

Section B4 email address: [email protected]

In 1987, about 77 out of the top 100 individuals with the highest tax obligations in Japan were involved in land speculation, either through selling their lands or owning large land properties. This created an unhealthy economy heavily reliant on the land market. Any disturbance in the land market would greatly disrupt the overall economy. As time went on, the situation worsened. In 1989, 95 out of the top 100 heavily taxed individuals were engaged in land speculation. The profitability of the land market played a significant role in this. Many enterprises solely focused on speculating in the market, resulting in a real growth of only 4 to 6% in the country's GDP. The economic growth mainly occurred in the nominal sector, leading to a significant appreciation of the yen. This had a tremendous impact on export businesses and manufacturing industries as higher nominal prices made foreign buyers less interested in Japanese goods, particularly affecting small and medium enterprises. Meanwhile, some export businesses struggled, resulting in inadequate income increases for workers. In 1986, Nissan experienced a decline in income for several high-level executives by 5 to 10%. Many of these executives were frustrated as they were already in their forties and had to cover mortgages and their children's tuition fees.In later years, Nissan announced a cut of 500 jobs in order to balance out their losses. This was a reflection of the struggles faced by large manufacturing companies like Nissan during this period. However, the impact was even worse for small and medium-sized enterprises, particularly those involved in exporting. Many of these companies either had to terminate contracts or shut down

completely during the mid-80s. As the wave of income cuts continued, employees at every level and across every class were affected.

On the flip side, the high exchange rate proved to be advantageous for importers, including energy, petroleum, and primary material industries. They were suddenly experiencing significant wealth growth, resulting in higher incomes for their employees compared to those working in export enterprises. Consequently, there was a substantial gap in profitability and income between these two distinct groups of companies, which created an unhealthy situation for white-collar workers.

(11) - Iwami Toru, "Japan in International Financial System", MacMillian Press, New York 1995, pg. 178

(12) Iwami Toru, "Japan in International Financial System", MacMillian Press, New York 1995, pg. 178

(13) Cao Man Kit, "The Strategic of Japan Enterprise", Ming Chang, H.K. 1992, pg. 135

This period of high exchange rate continues until the bubble bursts. The decline of the bubble economy occurs during the Gulf war period. The economy in Japan was very quiet, and at the same time, the government had tightened their policies, including tax policy and restrictions on loans. As a result, the land speculation market and land prices fall continuously, causing the real estate market to freeze. According to the National Land Agency, land prices in Tokyo and Osaka have dropped 30 to 50 percent. This is a significant decrease considering that total land wealth is near 2000 trillion yen. Many real estate properties were unable to be resold, leading to an increase in bankruptcies among companies unable to pay high interest payments. Additionally, banks were hesitant to provide loans, causing many companies to cut back on capital spending. This lack of investment further hindered the

economy's recovery. The majority of companies that went bankrupt were small or medium-sized enterprises without a separate bank center. However, even large enterprises with separate bank centers suffered due to non-performing loans from these smaller businesses. Other large lending institutions also experienced significant losses as the decline in land values strongly impacted Japan's lending institution balance sheets. According to a June 18, 1996 report from The News Times International News, the parliament approved a $6 billion emergency budget to address the financial crisis caused by this burst bubble.A $3 billion bailout has been approved for housing lenders that are bankrupt. The purpose of this bailout is to establish an institution that can liquidate the assets of the collapsed housing lender, which faced issues due to bad loans given to real estate speculators before the decline in Japanese land prices during the early 1990s. It is estimated that the seven companies involved have accumulated over $65 billion in bad debts. However, it is important to note that this $3.6 billion bailout is just one part of a larger problem. According to the Finance Ministry, as of March 31, 1996, Japan's financial institutions held approximately $324 billion in bad loans. Analysts believe that the actual total could be much higher. In recent days, the government has been working towards convincing banks and farm cooperatives to agree to a larger share of the bailout burden.

to minimize the burden on taxpayers". A recent financial post in Tokyo stated that most banks announced yesterday that they were able to transform last year's deficit into net profit for this year (ending in September).

(14) - Kenneth V. Smith, "Inman News", June

1996 Version, Section B4 email address: [email protected]

(15) - The email address for Kenneth V. Smith of "Inman News" in the June 1996 version, can be reached at [email protected].

(16) - Herman Li, "Sing Tao News", November 23 1996, Toronto, Section B 12

Banks have written off many uncollectible accounts systematically, but their revenue remains low due to low interest rates and an increase in bad debts. As a result, financial institutions will likely experience a prolonged period of recession. This has also had residual effects on the land speculation spill-over, which is still ongoing. Land developers have also suffered greatly from this. Prior to the public exposure of the land market crash, there were approximately 1,200 approved or under construction golf courses. Many pre-memberships were sold, but unfortunately, a large number of these constructions were never completed as banks revoked loans. At its peak, the total value of the golf membership market in Japan reached nearly 200 billion for 1,700 golf courses. Therefore, the closure of 1,200 golf course constructions resulted in significant economic losses. Another consequence of the burst bubble is the high vacancy rate in office buildings in Tokyo. During the late 1980s, the rate of new office building construction was double compared to traditional rates. However, after the bubble burst, asset values decreased and demand for office space plummeted. Consequently, many office buildings now remain unoccupied. It is evident that the aftermath of the burst bubble has not only affected business enterprises and government institutions but also impacted grassroots individuals."In the previous year, Japan experienced a sluggish economic growth rate of only about 1% or even lower. To address this, the government implemented economic

revitalization policies, including historically low interest rates and increased public investment. However, the effectiveness of these measures seems uncertain as evidenced by the cooling off of consumer demand and the corporate sector's stagnating capital investment, deviating from expectations. Consequently, the outlook for Japan's economic recovery remains unclear. The bursting of the bubble has impacted all individuals in Japan. The country has unfortunately fallen victim to the same distressing phenomenon of debt deflation that had already afflicted many economies for several years. Japan now faces the harsh reality of outright deflation, manifested through declining prices, which poses challenges for companies in maintaining their profit margins. By the autumn of 1993, Japan encountered an undesirable combination of excessive production capacity, decreasing demand, and a notably strong yen. Wholesale prices were declining rapidly at an annualized rate of 4.2% by August 1993. Once again, it is evident that a significant number of Japanese citizens hold pessimistic views concerning the future state of the economy."

(17) Wood, "The Bubble Economy", Sidgwick & Jackson, London 1992 pg. 205

(18) Wood, "The Bubble Economy", Sidgwick & Jackson, London 1992 pg. 206

As a result, the land speculation had adverse effects on the Japanese economy both during and after the bubble period.