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China is repeating the mistakes of Japanese real estate bubble burst

Cao Jianhai
2009-08-28

Japan’s economy has maintained an annual growth rate to Surprisingly, several decades of growth, while maintaining the lowest in the industrial countries, inflation rates, in the 20th century, 80 years by many analysts and scholars predict will become the world-scale largest economy. However, since 1991, the Japanese economy suddenly collapse, house prices are production prices plunge, a number of Japan’s major banks declared bankrupt, the Nikkei dropped quickly to less than half in 1990. What factors have contributed to the collapse of Japan’s economy? It is left to us what lessons? Is worthy of our way of learning.

1, a large, inefficient public investment program

After appreciation of the yen, out of the deteriorating situation in international trade, product demand reduction and lower GDP growth concerns, the Japanese authorities concerted effort with all departments to take, including low interest rates, monetary easing policy, as well as some structural reforms and deregulation and other measures to to stimulate domestic demand.

From the spring of 1987, the Japanese central government out of tight fiscal policy, adopted a large-scale emergency spending policies, the adoption of a domestic public investment for the total value of up to 6 trillion yen in additional budget. Local governments have also been the central government proposal for them to expand the regional re-development plan. Meanwhile, the Construction Ministry canceled the city’s planning and building limitations, and encouraging domestic enterprises to participate in re-development plan. These moves mark a proactive fiscal policy, and in the economy generated a lot of investment.

Public expenditure items to the related industries, especially in the construction industry, raw materials and heavy industry sectors, first of all brought growth and prosperity. Government of the grand development plans will be pushed land prices to a very high level. National Land Agency began to “Tokyo regional reconstruction plans” will be re-developed into a downtown Tokyo, an international financial center, the land prices in central Tokyo has been very clearly improved.

Public investment in the demonstration, the public believe that land prices will continue to grow, domestic demand will also be further improved. Land in the public works and low interest rates, spurred by the rapid rise has attracted a lot of money from home and abroad. During the period 1985 to 1990, housing investment and consumer durable goods spending increased steadily, while business fixed investment is also on the rise. This was seen as the main driver of economic growth.

The study found that 80 years in the 20th century, Japan’s economy is mainly by investment rather than consumption-driven. This investment-driven economy between production and consumption distortions, making the capital stock makes the economy more dynamic inefficiency. Investment-driven over-investment caused by explosive growth, and ultimately rupture of credit and production cycle.

Second, extremely loose monetary policy and monetary policy

Loose monetary policy is a necessary condition for generating foam. In response to “Plaza Accord” after the yen’s appreciation to the adverse economic effects of the Fourth Year in 1986, the Bank of Japan to cut the benchmark interest rate from 5% to 3%, and 87 years in February again by 0.5%, to the time historical low of 2.5%. To the mid-87 Japanese enterprises through technological innovation and business rationalization efforts, a substantial increase in high-tech exports, the economy began to show signs of recovery. However, due to concerns about the U.S. stock market crash caused by depreciation of the dollar, as well as the sustained and stable domestic consumer prices, the Bank of Japan will be 2.5% of the ultra-low interest rates of 2 years and 3 months, until 89 years, until May 31 upwards to 3.25%.

Long-term sustained low interest rates make a substantial increase in money supply, the emergence of the so-called “liquidity glut.” As the appreciation of the yen and raw material import prices down, “excess liquidity” and did not show up on the price. Which to some extent the economic theory behind, leading to CPI statistically untrue. In accordance with the original statistical methods, Japan’s CPI at the end of the bubble economy began to rise slowly: in March 1989 over the previous year increased by 1.1% to April 1990 more than 2%, the same year in November reached 3% above, until August 1991 has remained at this level.

The Japanese government policy of expanding domestic demand, encouraged by the country set off a land development boom. A lot of money flowed into the stock and real estate industry, making asset prices skyrocketed. As the delay does not appear to inflation,

Bank of Japan will be the exchange rate and price stability as the primary goal, ignoring the rise in asset prices, resulting in asset inflation. In the “excess liquidity” passed to the CPI, the Japanese central bank’s tightening policy has become Japan’s asset bubble burst in the fuse. Can be seen that the bubble blown a prerequisite for the continuing large loose monetary policy, and commodity prices rise by, loose monetary policy can not be sustained, large-scale asset price bubble will not form. It now appears that a laissez-faire expansion of the bubble caused by the loss than the mistake of taking the austerity policy to economic development brought about a greater negative effect.

Third, the occurrence of the real estate bubble and bust

1985 to 1990, five years, the Japanese urban land price in the already high levels rose another 2 times, in which the central area of Tokyo land prices rose three-fold. The end of Japan’s land assets in 1990 amounted to ¥ 2389000000000000, compared with the end of 1985 increased 1.4-fold, the increase of ¥ 1385000000000000 equal to three times the GDP at that time. Chuo-ku, Tokyo, commercial buildings and land prices in 1982 for 3.5 million yen per square meter in 1990 up to 3200 yen, converted at current exchange rates the equivalent of 220 thousand U.S. dollars per square meter. In 1990, only Tokyo’s land prices is equivalent to the United States the country’s land prices, land the size of the United States, California, Japan, the total value of the land is almost four times the United States. Not only the land continued to soar, but also produced a crazy price linkage, resulting in land and stock bubble era of mutual promotion, circulation rose.

In March 1990, the Japanese Ministry of Finance issued “on the control of land-related financing requirements,” land finance in total control of this man-made emergency brake has led to a natural decline of an already into the whereabouts of the bubble economy to accelerate and lead to support the the core of the Japanese economy’s long-term credit system collapse. Since then, the Bank of Japan has adopted the policy of monetary tightening, and further led to the bursting of the bubble. December 29, 1989, the Nikkei index reached 38,915.87 points, the highest since started to decline, land prices have also started to decline around 1991, the bubble economy began to officially broken. Asset prices plunge, leading to a large number of book assets of companies in just one to two years come to naught.

During the bubble economy, in addition to real estate and construction companies, the Japanese almost all large companies are involved in varying degrees, real estate, real estate prices plunge and long-term economic downturn, resulting in a large number of deeply involved in real estate companies to close down. Real estate prices continue to fall, so that many real estate developers and construction companies in the real estate investment in a serious failure, inability to repay bank loans, had to declare bankruptcy. With land prices continuing to decline, the declining value of the security, leading Japanese financial institutions, the size and proportion of non-performing credit assets is growing, the capital adequacy ratio dropped substantially. The resulting financial structure of Japan’s financial institutions are very fragile, and anti-risk ability is low, some financial institutions and even appeared in a liquidity failure and other issues. Since then, Japan’s 10 largest banks in the Japanese long-term credit banks, Nippon Credit Bank and Hokkaido Takushoku Bank closed down, small and medium financial institutions, bankruptcy is one after another, Japan’s financial system has undergone an intense turbulence of the function of the Bank of Japan have been hit.

4, Japan, China has earnestly draw lessons should be present

From the macro-economic policy review, the lessons of Japan’s bubble economy tells us: first, to prevent due to exchange rate adjustments, in particular the appreciation of local currency led to asset bubbles, and making an economic bubble. Secondly, especially in the period of price stability, but also should beware of assets bubbles, otherwise bound to burst the bubble catastrophe. Third, we must deal with the current economic prosperity and long-term economic relationship between the sustained and healthy development and can not be taken to stimulate short-term economic growth and jeopardize long-term development of macroeconomic policies. Because both fiscal policy or monetary policy, economic growth can not solve the fundamental motivation.

The formation of the real estate bubble from the point of view, the real estate bubble in financial institutions should maintain the highest degree of vigilance. 1985-1990 Yearbook, Japanese financial institutions to inadequate understanding of the real estate bubble of the hazards, have to the real estate and construction companies and loans to form a continuous appreciation of the real estate and credit, expanding the size of a vicious circle, the greater the bubble blowing. The financial institutions in pursuit of high profits, real estate loans as the best loan program, the uncontrolled expansion of the credit scale, fueled the bubble formation. On the bubble about to burst in 1991, Japan’s 12 major banks to the real estate industry paid a total of 50 trillion yen loans to total loans 1 / 4.

Secondly, the Japanese bubble burst in to tell us that the world has never been up not only off the real estate market. In Japan’s rapid economic growth and general improvement in living standards of the late 80’s, the Japanese people and investors generally believe that less people and more contradictions will lead to Japan’s land prices continue to rise, not fall forever rise. Therefore, even if the land useless, all companies are trying to win, resulting in high land prices and house prices further and further. As speculation over investment, resulting in a false real estate boom. People from bank loans to purchase real estate, and then re-use real estate as collateral Zaiqu to buy real estate, causing a great deal of duplication of mortgages and loans, and increased real estate prices skyrocketed.

Finally, the Government of the real estate bubble bursts and housing prices can not remain indifferent, but should actively governance for economic development to create a favorable external environment. Japan’s real estate bubble finally burst, a very important reason is that the Government respected in the field of asset markets, “governing by doing nothing” thinking, to land and housing prices skyrocketing without intervention, as an important reason for the bubble economy. From the beginning of 1990, the Japanese government began to intervene in housing issues, has taken some to stabilize prices and curb land speculation measures. In the bitter lessons of the bubble economy, on the basis of a deeper understanding of Japan through government intervention, has made the 11-year land price stability, it is worth, including China, other countries should learn from the