The Economy of Japan had experience a tremendous growth since the end of theKorean war.
The growth of GNP in 1967 and 1968 was above 10 % (double digitgrowth period) which exceed countries such as Britain, France and Germany. Theeconomy experienced a boost is due to many reasons, such as: enlargement ofindustrial facilities, massive adaptation of western technology and education,lower the military expense to 1% of GNP, relation with power nation, humanresources and their spirit to achieve “zero defect program”. But after the firstand second oil crisis that occur from 1973 onward. The economy move downwardspartially due to the poor management of economic policy. Although the governmenthad attempt to adjust the economic policy but the recovery was slow. As thesoaring of yen continues the demand for export has increase tremendously. Withthe concern of the United State of this problem, president Reagan and the G5have signed an agreement with Japan called “Plaza Agreement” , the agreementstated that the exchange rate of Japan and Deutschmark can appreciate againstthe U.
S. . Since then the yen value began to appreciate, Japan was goingthrough a period of trade balance adjustment. While Japan is prepare to gothrough a period of trade balance adjustment, it will also suffer a period ofrecession, so the government strongly encourage business activities tostrengthen the economy in order to prevent backwash effect. It was this eventwhich boost up the GNP and raise the exchange rate. With this exchange rateadvantage it stimulate business activity on housing and stock investment whichcreated a bubble economy. During this period almost the entire country wasinvolve in land speculation or other speculate activities.
In this essay itwill prove that land speculative activities had create many negative impacts tothe Japanese society and economy. Firstly, it will describe the cause of landspeculation. Secondly it will discuss on the society and political effects inJapan and lastly it will focus on the economy effects, more over it will includethe aftermath when the bubble collapse.The root of this bubble economy is due the wave of land speculation. The widespread of land speculation activities were mainly because it is profitable. Thespeculative transactions in assets grew and grew and many believe that this willlast for very long period of time. One of the reason that leads to massiveinvestment in the risky activities is because of the success of the Japanese inthe international market during 70*s – 80*s.
Many Japanese enterprises andbusiness man had become very wealthy. These people have a large sum of equityto invest. Some of these people have focus on risky asset such as stocks andland, therefore many of the regular ventures were left behind. One of the majorcause of the massive transaction in the land market was due the incremental ofloans by banks. Financial institution was very positive in lending money to theenterprise. This enhance the accessibility to the land speculate market. Eachsize of this loan is very large.
This is because the size of mortgage in Japanfinancial institutions are based on the collateral, (house) while in NorthAmerica the size of the mortgage is based on the borrower*s income stream.Therefore the size of loan can be obtain by borrower is larger in Japan thanNorth America. Also 62% of Japanese households own the home that they live andin average the value is near 4 million yen. Therefore there are lots ofpotential investors.
And during the period of speculative activities, borrowersincrease the value of their loans as the value of their collateral increases.Since asset is highly liquidate, the number of potential speculators are highand borrowers in Japan were able to get a larger size loan on real estatetherefore speculative activities sink into the level of common home owner andlarge enterprise. Beside the method of calculating mortgage size, another reasonwhy the size of loan was so large is probably that both the bank and theinvestor were behind the land speculation activity (banking scandal). Investorswere paying some key money (sort of a bribe) to financial institution in orderto obtain a larger size loan. Therefore many financial institutions were overloan during this period. Another form of raising cash flow for the speculatemarket was by braking down a loan that obtain from a large financial institutionto a specific enterprise, then lend a small piece of this loan to those who wasnot eligible to obtain a loan from the bank. These companies that act as thefunnel will earn a certain amount of interest from these smaller companies(branch effect).
Therefore all classes of companies and society can easilyaccess in the speculate market. Other large corporate, construction company,organize crime group and even temple (religious) were also involve in landspeculation. Another encouragement to the speculative market was because thegovernment (liberal democratic party) had originally lower the capital gain taxin the early 80*s. Therefore the profit for owner to resale their land waslarge.Flaws in government policy also indirectly allow investor to get away ofproperty tax expense. For example some land owner could just plant little cropsover a large piece of expensive vacant land in urban city and declare them asagriculture land. As a result they will be tax very little.
Therefore theincremental of land speculative activities were due to over size loan, highaccessibility to the land speculative market and indirectly by the governmentflaws. During the peak of the land speculation there is a quite interestingstudy of land price in Japan. (1) “If you sell the entire property of Tokyo youcan actually buy the entire United state and by just selling the surroundingland of the Imperial palace you can buy Canada.” Although it might of been alittle over exaggerate, but the point is that the land value in Japan compare toNorth America is much higher. Since there is no one side of a coin, Landspeculation had create many social problems in Japan. Firstly, land speculationhad rise the rent and housing cost tremendously.
As a result many young couplesand low income families were unable to form their own house hold. In averagethe cost of a house in Tokyo had raise to about 500 million yen. The youngergroup with low income cannot afford it and the mid age workers may also not ableto afford it.
Primary is because they would have to give up at least three-fifth of their income in loan repayment. Also if they have a relatively lowamount of down payment, there working age may not be long to repay a mortgage.The longer the amortization period, the larger the amount of interest they bare.The white collar had become the slavery or sacrifice of the never endingmortgage payment and high cost of housing. In 1990 the births live in Japan was1.2 million, in fact the number is the lowest since 1893. Many analysts believethat one of the reason that lead to this slow growth of population could becreate by high house prices.
So Japanese people have stopped having childrenand large family is rare. Therefore this is one of the causes of Japan isrunning our of Japanese. This is also a very big social issue of the modernJapanese society but the precedent of the slow growth of population has now movefrom high housing cost to other social problems. During this period, there werelots of cases regarding on the robbery and suicidal in the police force. Thiswas mainly because of the heavily debts that these police bare and they have noother choice than to attempt to go above the law.
Due to the financing problemsin the real estate market, it leads to the founding of what is program call “2generations mortgage plan”. The founding of this plan was propose to suit themajority of the white collar in the Japanese society. This plan was developsince 1983 but it became more useful from 1985 onwards and the qualification ofthis program must be father-son that plan or already living together. (son mustbe older than 20 and must repay the loan by the age at 70) The size of themortgage is determined by the borrower, interest is flexible and the applicantsmust purchase an life insurance in order to protect the risk of un collectibledue to death. (Pay by the bank) Husband and wife can also join this program .Banker said that the applicant may able to repay this loan in 40 yr. and thistype of program also encourage a bonding relationship between father and son.
On one side this program may allow a regular income worker to be a home ownerbut on the other side this person will bare a debt for the entire life andpasses on to the next generation. Moreover it may limit on the consumption ofthe borrower on other composite good. The booms in land prices also discouragepeople’s incentive to work.
(2) “Because if any lucky individuals inherited orown a piece of land in metro Tokyo, they will suddenly gain a net worth of 250to 300 million yen.” This amount of money is equivalent to honest man*s lifetime income plus retire pension. Since may people get rich during this period,the number of middle class income in Japan had tremendously increase. Underthese circumstances, many believe they have already achieved the good lifetherefore people lose the incentive to work hard and get ahead.
Therefore itwill distort the social structure in Japan and create many problems to thegovernment (taxations).Since the sacrifice and cost of home ownership is sohigh therefore many Japanese had prefer to rent. Since the demand of rentalmarket increase, it also attracted many investor and speculator. Thereforetenants also suffer from the incremental raise of land price. In Japan, youngcouples, low income group and the elderly participated as the major group oftenant in Japan. During this period, owners were looking to sell their propertyfor high return and in order to force the tenant to move (after tenant moveslandlord can chose higher quality tenant or resale the property for a largerprofit) rent rises extremely high. Many elderly were unable to afford such highrent so many were force to move.
As a result many had become homeless. In somecases tenant refuses to move so some owner will hire organize gang group toforce them out. Some of these unfortunate tenants will give up the hope in homeownership in the core and move further and further away from the center.Therefore many of them will spend over 2 to 3 hours to commute from their placeto work. So either way, home owner ship and tenants suffer from the raise ofhousing price. The natural populations are not the only civilian of thisincident.
Many foreign students also suffer from the housing problem. (3) “In1986, there was a statistic taken over a total number of 8116 foreign students.Apparently only 17% lives in an adequate resident facility.” The primary reasonwas due to the cost of rent, high exchange rate and lastly it was because thelocal people do not wish to rent their property to foreign student. Studentassociate had propose to built new resident housing but due to the heat of landspeculation (create an increase in the demand of land) and high constructioncost, the new residential housing will be very costly. Therefore this newconstruction will probably raise the rent 2 to 3 times.
While the housingproblem continues for foreign students from 80 onward the Japanese governmenthad still declare that they (4) “expect a total of 100,000 new foreign studentwill be coming in during the 21st century.” This reflects that the governmenthas pay very little awareness not only on the natural population but alsoforeign student. Beside foreign students and the natural population, anothergroup that affects by the high land prices was foreign ambassador. As the pricecontinued to rise (specially in Tokyo), the ambassadors of the lower wealthcountries (such as Africa or Uganda ) were force to move their location awayfrom Tokyo due to high rent. Although this problem was reflect to the Japanesegovernment but it was remain un solve. Other side effects of the landspeculation was the new residential construction during that era. In (thousandleaf city) many of the new construction area no longer have a large plain orplay ground that similar to a traditional residential area.
In one of the Japanese newspaper there is an advertise article that describestheir forecast on the living condition of the Japanese in the 21st century. (5)”The husband should not return home until weekend, during weekdays just live inworker*s resident near their workplace. This resident housing should be similarto hotel where it has an into desk that can wash your cloths, postal service andtake your message. Their home should be in some rural or less urban area that100 km away from work.” This reflected that the rise of land value did not justonly effect the affordability of the housing but also distort the lifestyle ofthe Japan workers as it had reflect in the earlier incident of the 2 generationsmortgage. (6) “During the bubble economy period the zoning regulation in Tokyohas revise to allow builder to built more capital on the piece of land.
So thisindirectly rises the potential of building space in Tokyo. It will again raisedthe real estate value, property taxes and traffic congestion level of the area.”According to the (7) “National Land Agency statistic, about half of firmssurveyed in the mid to late 1980s responded that they had no development plansfor the land that they acquired.” They rarely built homes or apartments, butinstead constructed office buildings that would bring in steady revenues. Fromthe developer*s point of view, houses and apartment are the least profitableprojects.
So land would almost never allotted for housing”. With landspeculation and the shortage supply of new construction on housing the Japaneseresidents are very difficult to find an affordable place to live beside thehouses that are very far from work place. In the current Japan election thepercentage of participant voters in Japan has drop below 60% of the totalpopulation and the liberal democractic did not receive 50 % of the seat throughelection. This percentage was the lowest since WWII and mainly was because thepopulations in Japan no longer believe the liberal democratic party can bringthem back from recession.
Also they did not have a good control system duringthe bubble economy, failure of the recovery program after the bubblesplash.(program such as expansion in public investment, lowering the interestrate and series of economic counter measure but the yen is still pretty highwhich discourage export) In more specific, during the bubble economy thegovernment did not really propose an effective tax law until 1990. (NationalLand Value Tax- prohibitive tax on profits from the sale or transfer of landnational land law 1974) This revitalizes the local property tax and assessmentratio for the fixed asset tax. Another official policy was issue during 1990was through the financial market in which the government regulates on the loanactivity. This eventually slow down the loan activities largely in 1991.
Butstill the government really lagged their response for those who already sufferfor 5 years of high housing cost. More over during the period of bubble economy,many politics were either involve in land speculation or was bribe by organizegang group and large enterprise in order for these people to be moreconveniently to have more benefits in the land market. One incident is involveby a business man Kyowa and a cabinet minister Fumio Abe, where Abe sold thedetails of where a new road construction in Hokkaido in return for 480 millionyen. Political scandal was expose to the public not long after the bubbleeconomy was splash. Lastly, most of the asset of the politicians are in thereal estate market therefore neither the bank or the officials admit the fall inland prices. So when this incident was expose to the public, the prices of landfall sharply around 50 %.
And mainly because of the period of cover up. So manybig and small investors suddenly woke up from their happy dreams and face thehorrible reality. With the above reasons the government has lost the trust ofmany Japanese. Therefore the land speculate activities had also effect the imageof the strong liberal democratic. During the bubble splash period, many pre-graduates and graduated university students were unable to find jobs in thelabor market due to the diet all companies therefore many students werefrustrate about their future.
Therefore the supply of the labor market isdistorted by the bubble burst. Therefore you can see that the land speculationactivities had create many social problems to the Japan society during thebubble period and after the bubble burst.During the bubble period the economy was strongly boost by the sudden rise ofland value and stock market. On the other hand the after math of the bubblesplash was a pain for the economy.
In general we will look at the effects on therise and fall of the Japan*s economy.In 1985 the trade balance in Japan need to have adjustment therefore thegovernment declare that it needs some force to grow in order to preventrecession during this adjustment period. (8) “In 1989 the GNP has increased by481,000,000,000,000 yen and this was mainly due to the speculate market.”(People put their profit from land to stock market or vice versa) Many companieswere mainly focus on the speculate market. (9) “The Tokyo Stock exchange soaredto almost 40,000 points, the value of stock and land was far above the realvalue and value of property was not rise due to its demand but was due tospeculation.
Eventually when the bubble splash, the vacancy rate went rockethigh due to lack of demand. Many companies had to go on a strict diet to survive,and they made deep cuts in expenditures for entertainment, advertising,communications and much else.” And the above statement is the general picture ofwhat happen during the bubble economy. During the golden period of landspeculation, many investors know that the land market in Japan was limited (dueto the potential and limited geographic area) so they began to purchase landover sea in Hawaii. (10) “The Non water front housing price in Hawaii during1987 went up by 51 % and the water front housing price went up more than 100%.”This resale land market in Hawaii was primarily between the Japanese; in 1987the land prices was estimate has rise over 60.2% and many tenants have suddenlyrealize that the rent has tremendously increase and cannot afford it, so manypeople have no place to stay (especially the elder).
There are several reasonsthat Japanese wants to invest in Hawaii such as; the waterfront view is similarto Japan so it will be a good place for vacation and retirement, the distancebetween Japan is relatively close ( 3 hours trip by plane) and massive left overof equity and advantages in the exchange rate that has tremendously increase thenominal value of their equity so it is an encouragement for investment.Therefore the wave of land speculation did not only distort the land market inJapan but also affected foreign country.Looking back at the Japanese economy (11) “in 1987, 77 out of the top 100 mostheavily taxed people were involve in land speculation (either have resale theirlands or have large land properties). This created a very unhealthy economybecause most of the economy is depend on the land market and if any thing happento the land market, it will distort the economy greatly. (12) “In 1989 the top100 most heavily tax people 95 of them were involve in land speculation.
“Therefore the situation was worst in the later period this is mainly because ofthe profitability in the land market. Since many enterprises only focus onspeculate market therefore the real growth of GNP of the country was only 4 to 6%. The growth of the economy was mainly on the nominal sector. The increase innominal GNP has created massive appreciate of yen, which had tremendously affectthe export businesses and the manufacture industries. (the nominal price of thegood has increase therefore foreigner has less interest on Japan goods but thismainly effect small and medium enterprise) While some export business was notdoing too well, consequently the workers are not getting an appropriate rise inincome. (13) “In 1986 (Nissan) several of the high executive had experience anincome cut by 5 to 10% and many of them are very frustrated because most ofthese people were in their 40*s and have to pay for mortgages and children*stuition. In later years Nissan had announced to cut 500 in order to balance outtheir lost.
” Therefore large manufacture as Nissan was not doing so well duringthis period. This was worst in the case of the small and medium enterprise.Many small and medium size export companies had contract or even close downduring the mid 80*s and as the wave of income cuts continued, every level andclass of the employees were involve. On the other hand the high exchange ratewas really an advantage for importer (same value buy more) such as energy,petroleum and primary material. These companies were suddenly becoming sowealthy and the income of their employees were much higher compare to thoseworking in the export enterprise.
Therefore there was a large gap on the profitand income between the two distinct groups of company and it was very unhealthyfor the white collar.This period of high exchange rate continues until the bubble burst. The declineof the bubble economy occurs during the Gulf war period, the economy in Japanwas very quite and at the same time the government had tighten their policy.(Both tax policy and restriction in loans) As a result, the land speculationmarket and land prices fall continuously. The real estate market is totallyfrozen. The National Land Agency measures that land price of Tokyo and Osaka hasdropped 30 to 50 percent.
(Total land wealth is near 2000 trillion yen which isreally a lot) Many real estate properties were unable to be resale and at thetime many companies were unable to pay such high interest payment therefore manyof them went bankrupt. While the banks rarely make any loan, many companies cutback in their capital spending. In fact this had dampen the recovery of economy.
Most of these companies that went bankrupt were either small or medium sizeenterprise which lack of its separate bank center. Large enterprises withseparate bank center also suffer from non performing loans by the borrowers(small and medium size enterprise). Others large lending institution also sufferlargely, since the major economic powers at the bubble period was on the landmarket therefore any decline in land values would strongly influence the balancesheets of Japan*s lending institution. As reported in June 18 1996 The NewsTimes International News that the (14) “parliament approves a $ 6.
3 billionbailout for bankrupt housing lenders. The vote clears the way for theestablishment of an institution to liquidate the assets of the housing lenderwhich collapsed under bad loans made to real estate speculators before Japaneseland prices plummeted in the early 1990s. The seven companies are believed tohave more than $65 billion in bad debts.” This $.6.
3 billion is only a piece ofthe big picture because (15) “the Finance Ministry said that Japan*s financialinstitutions held about $324 billion in bad loans as of March 31 1996. Analystsbelieve the total could be considerable higher. The government in recent dayshas been working to persuade banks and farm cooperative to agree to take on abigger share of the bailout burden to reduce the cost to taxpayer”.
Accordingto a current financial post in Tokyo: (16) “Most of the financial banks declareyesterday that with the experience of deficit in last year, this year (endedtill September) they had turn deficit into net profit.Banks had systematically write off many of the un collectible accounts. Buttheir revenue is still not very high because of low interest rate and theincremental of bad debts.
Therefore financial institution will still probablyexperience quite a long period of recession.” Therefore residue effects of theland speculation spill over still continues. Land developers also sufferlargely.
Before the land market crash was expose to the public, there werenearly 1,200 golf course was either approve or under construction. Many pre-member ships were sold but unfortunately many of the construction are neverfinish because of banks were pulling back the loan. At peak, the total value ofgolf member ships market in Japan was near 200 billion for 1,700 golf courses.Therefore closing down 1,200 golf course construction was quite a lost for theeconomy. Another aftermath of the bubble burst is the high vacancy rate in theoffice buildings in Tokyo. During the late 1980*s, the new constructing rate(for the office buildings) was double compare with the tradition. After thebubble burst, the value of asset decreases and demand for space also decreases.
Therefore many office buildings are unoccupied. As you can see, the after mathof the bubble burst did not only affect the business enterprise, government butalso the grass root people. (17) “In last year the economic growth rate wasonly around 1% or less and the government had introduce economic revitalizationpolicies such as lowest ever interest rates and increased public investment butjudging by the fact that consumer demand has cooled off and capital investmentby the corporate sector is not making headway as expected therefore the outlookfor economic recovery in Japan remain hazy”. The bubble bursting has affectedeveryone in Japan. (18) “The country has clearly become a victim of the samewrenching process of debt deflation that had already been visible for severalyears in so many other economies. Japan faces the reality of outright deflationin terms of falling prices. With all that implies for companies inability tomaintain their profit margins.
Japan was facing by the autumn of 1993 anunpleasant combination of excess production capacity, falling demand and arampantly high yen. By August 1993 wholesale prices were declining at anannualized rate of 4.2 percent.” Once again you can see that many Japanese arenot very optimistic about the future economy.
Therefore you can see that the land speculation had create many negative impactsto the Japan economy not only during the bubble period but also after the bubbleburst.Bibliography(1) – Wood, “The Bubble Economy”, Sidgwick ; Jackson, London 1992 pg. 50(2) – Wood, “The Bubble Economy”, Sidgwick ; Jackson, London 1992 pg. 61(3) – Cao Man Kit, “The Life of Foreign Student in Japan”, Ming Chang, H.K.1991, pg.160(4) – Cao Man Kit, “The Life of Foreign Student in Japan”, Ming Chang, H.
K.1991, pg. 167(5) Cao Man Kit, “The Strategic of Japan Enterprise”, Ming Chang, H.K. 1992,pg. 68(6) Mc Millian Charles, “The Japan Industrial System”, Berlin, New York,1996 , pg.
56(7) Wood, “The Bubble Economy”, Sidgwick ; Jackson, London 1992 pg. 89(8) Iwami Toru, “Japan in International Financial System”, MacMillian Press,New York 1995,pg. 135(9) Iwami Toru, “Japan in International Financial System”, MacMillian Press,New York 1995,pg. 135(10) Kenneth V.
Smith, “Inman News”, June 1996 Version, Section B4 emailaddress: emailprotected(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(14) – Kenneth V. Smith, “Inman News”, June 1996 Version, Section B4 emailaddress: emailprotected(15) – Kenneth V. Smith, “Inman News”, June 1996 Version, Section B4 emailaddress: emailprotected(16) – Herman Li, “Sing Tao News”, November 23 1996, Toronto, Section B 12(17) Wood, “The Bubble Economy”, Sidgwick ; Jackson, London 1992 pg. 205(18) Wood, “The Bubble Economy”, Sidgwick ; Jackson, London 1992 pg. 206Category: Business