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Bubble Economy Essay

1655 words - 7 pages

Japan’s Bubble Economy
An asset bubble burst in Japan during the late 1980 till early 1990. Many problems were still affecting the Japanese today. It all starts with asset price skyrocket in Japan. During the 1980, stock price, and many others assets double it prices and some even tripled in just less than five years. The whole economy did not rise with the asset price and it causes many problems. In the early 1990 asset price deflate and many companies were affected. Companies were those largely affected by the burst of the asset bubble and individuals were less affected, but the fall of asset price cause a chain reaction turn down in Japan’s economy.
In September 22, 1985, government of ...view middle of the document...

Land owners think they are making money because land price increase and this motivate the Japanese to consume new goods. The consumer demands stimulate the Japanese economy and Japanese think their economy is doing well. Investments were still a popular way to gain profit during 1987 and investment affected every industries in Japan (Shiratsuka). At that time people were thinking if land is needed than economy would not be in a recession (Shiratsuka). The investment market also encourages people to buy more stocks and some firms even say stock price will never decline from this point on (Shiratsuka). The gross domestic product of Japan had an average growth of 3.9 percent every year in the bubble economy period (Okina). At that time the Japanese were out performing other counties. During that time due to the flourishing appearance of the economy, Japanese media announce that they are experiencing an economic boom like the 1950s (Okina).
There are economist disbelieve that Japan is experiencing an economic boom. They point out that the land prices exceed the actual needs and economy will fall in the future. From the point of principle of economics, the land price increase and cause the business that rent the land decrease in profits (Ito). The government should lower the demand of land to regulate the value of lands to achieve equilibrium (Ito). Takatoshi Ito, a Japanese economist suggests that it is hard to notice when a bubble occurred in an economy. According to Takatoshi Ito the bubble economy can be prevented due to the following. In 1987, the Bank of Japan should not have cut the discount rate from 3 percent to 2.5 percent (Saxonhouse). Ito thinks the Bank of Japan should have raised the discount rate in 1988 to link with the rose of interest rate on loan (Saxonhouse). Ito think that tighten the monetary policy can stop the bubble from expanding. According to Ito it is too late to stop the bubble from bursting when the Bank of Japan raised the discount rate (Saxonhouse).
One of the big problems in Japan economy system is most Japanese companies use their book value of land to calculate the value of the company. When a company calculates the actual values of the company, the actual asset is higher than book value asset (Watkins). The difference in actual asset and book value asset created a misconception than the company is making money. Companies want to increase value in asset by owning and selling land (Watkins). Some companies use illegal methods to acquire lands in cities and cause social issues. The lands near the countryside were use for tourism and land price skyrocket due to furious buying and selling of lands (Saxonhouse). The profits that gain from selling lands were used to buy more stocks, bonds, memberships and oversea property. The high price of lands cause the people in big cities cannot afford rents and force to move to suburb area (Saxonhouse). People have the conception that land price will continue to go up and they...

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