Insight into Japanese Bubble Economy by Zhang Wei(Vivi) Xie Huawei(Amy) Hu Yingjian(Mike)
Content: • Define economy bubble • Use the graph analyze what is bubble • World’s first speculative bubble • Japanese economy from 1970s to 1990s • How did bubble form • Analysis the speculative activity in Japan • Analyze why Japanese pay much passion into housing not factory. • 3. How to measure the bubble in Japan • View the essence of Japanese from the recovery of the bubble economy • Focus on Neo-Confucianism • Analysis the mistake policy in Japanese bubble economy • Compare the China’s policy in the situation • 6. From Chinese real estate to analysis the situation before bubble burst of Japan and the status quo of China • Compare the two countries situation • 7. Our group discuss the revelation from the Japanese bubble economy
What is Bubble? • A bubble may be defined loosely as a sharp rise in the price of an asset or a range of assets in a continuous process, with the initial rise generating expectations of further rises and attracting new buyers generally speculators interested in profits from trading in the asset rather than its use or earnings capacity.
a trade in products or assets with inflated values Bubble economy?
Original speculative bubblein the world Tulip mania a period in the Dutch Golden Age during which contract prices for bulbs of the recently introduced tulip reached extraordinarily high levels and then suddenly collapsed
An introduction of Japanese Economy from 1970s to 1990s. Throughout the 1970s, Japan had the world's second largest gross national product From the end of 1980s to beginning of 1990s, Japanese economy increased dramatically, whichimplied the bubble economy of Japan In early 1990s, the bubble was collapsed
Mitsubishi invested $ 846 million to buy Rockefeller Center in New York Sony Corp. used $ 3.4 billion to buy the soul of America Hollywood Columbia Pictures Japan invested$ 6.5 billion in Hawaii
How the bubble formed? U.S. dollar exchange rate was too high large trade deficits in U.S. Plaza Account Japanese currency appreciation Japanese low interest rate policy Hot money
Speculation “Speculators create the bubble which lies above everything. They increase prices with their expectations, with their bets on the future, and their activities distort prices, especially in the commodities sector. And that is just like secretly hoarding food during a hunger crisis in order to make profits from increasing prices.” —— George Soros ‘Speculation’ and ‘speculator’ are used rather in a negative sense and speculation is not recognized as one of the most decisive incitements behind economic behavior. The difference between Speculation and investment is the fundamentals. And speculation at least contributed to bubble.
The Issue of Japanese Speculation In 17th century, speculators bought the harvests of Japanese rice famers. oil prices go up, the price of rubber also goes up and as a result the demand for natural rubber goes up. In 2011, Japanese earthquake strength yen appreciation.
The influence of yen appreciation Japanese manufactures move more operations overseas. Toyota, Honda and other Japanese companies try to move as much production overseas possible to cut costs. IMF lowered its growth estimate of Japan from 1.8% to 1.5%. 1996~2006, about 220,000 manufacturing sites vanished, causing a loss of about 3 million jobs in Japan.
Prevent the formation of speculative bubbles • Introduction of a trade register at the stock exchanges. • Authorized traders would be strictly regulated to restrict commercial trade to its insurance function (hedging).
Source:Datastream. That is Bubble!!!
The first mistake • In 1986,because of the appreciation of Yen, Japanese economy had a short-term recession. • The Central bank of Japan decreased the discount rate from 5% to 2.5%. This rate was not only the discount rate in Japanese history, but also was the lowest rate of other countries. • This expansionary monetary policy caused a large number of surplus capitals. • There are fewer favorable investment opportunities in the market, so these surplus capitals being channeled into stock market and real estate market. It caused asset prices increase sharply.
The second mistake • In the autumn of 1987, the world economy grew rapidly . In order to deal with the inflation, the United States, West Germany, and some other countries had to raise interest rates. • on October 19, 1987, the "Black Monday" broke out in New York. By the intervention of Western countries, "Black Monday" presented only as a market panic.
The second mistake • The U.S. government was worried that if the Bank of Japan raised the interest rates, money can not promptly return to the U.S. and European markets. It may lead the international market to be turbulent once again, so they recommended Japanese government should rise interest rates later . • The Japanese government was also worried that raising interest rates may cause more international capital inflow to Japan to promote the appreciation of the yen, and causing the recession.
The second mistake • The Bank of Japan had decided to continue to implement expansionary monetary policy to maintain the discount rate unchanged in 2.5% . Until May 1989, Bank of Japan started to raise interest rates , but at this time, the "Black Monday" had lasted19 months, and the low interest rate policy had lasted 27 months. • Extremely expansionary monetary policy caused the Japanese economy full of cheap capital.These capitals were been channeled into the stock market and real estate market in the end.
The third mistake • A sudden reversal of monetary policy pricked the stock market bubble firstly.
The third mistake • From may 1989 to August 1990, Bank of Japan raised the central bank discount rate from 2.5% to 6%. • the Japanese Ministry of Finance required all financial institutions to control the real estate loans, the Bank of Japan requires that all commercial banks to slash loan. • In 1991, Japan's commercial banks had actually stopped to provide loans on real estate industry.
The third mistake • In 1990, the Japanese stock prices fell sharply, it declined more than 40%, This decline of the stock market caused almost all banks, corporations and securities firms to huge losses. • Followed by the stock market, the real estate market bubble was also burst with the land prices dropped more than 46%.
Neo Confucianism • Self-Control or Asceticism • Back to Human Natures and Principles
Government: • Keep up with the increasing global economy • The range of the interest rise and economic growth rate remain consistent :2% • Tax reduction • Improve confidence of people: such as apply for 2016 Olympics Games
Society/Business： • Harmony & Order • Adjusting the way of investment • increase the amount of small and medium- sized business • In 1996, there are 5,090,000 SME, at 99.4% of all the enterprises. • In 2006, there are 4,198,000 SME, at 99,7% of all the enterprises.
Why in real estate industry people would like to buy it when the price increased?
Real estatebuy not buy Analysis from the demand function: D= f ( P, T, I, Pe, pr……) Original: price increase, demand decrease But: expected price >> price
Japan VS China • Asset prices • Currency Appreciation
Asset market • In 1989 Tokyo’s stockmarket had a price-earnings ratio of almost 70; today’s figure for Shanghai A shares is 28, well below its long-run average of 37.
Asset market • China’s property market is certainly hot. Prices of new apartments in Beijing and Shanghai leapt by 50-60% during 2009. • Average home prices nationally, however, cannot yet be called a bubble.
Asset market • The most cited evidence of a bubble—and hence of impending collapse—is the ratio of average home prices to average annual household incomes. This is almost ten in China; in most developed economies it is only four or five. • Chinese homebuyers do not have average incomes but come largely from the richest 20-30% of the urban population. Using this group’s average income, the ratio falls to rich-world levels. In Japan the price-income ratio hit 18 in 1990, obliging some buyers to take out 100-year mortgages.
Currency apreciation • It is Japan’s experience after the 1980s that most influences the thinking of policymakers in Beijing. • One reason why policymakers in Beijing have resisted a big rise in the yuan is that they fear it could send their economy, like Japan’s, into a deflationary slump.
Janpanese Yen Chinese RMB Exchange rate.
NO STORY TIME USA Salomon Brothers，Morgan Stanley-------Stock index put option ----BET------high reputation（Goldman Sachsmade the option, Goldman Sachs sold to Denmark, the Danish Government endorse） January 2, 1990,the option listed on the USA stock exchange, which made the global capital suppress the Japan’s economy.
The revelation from Japanese bubble economy Neo – Classical Model Y= f (K,L,T) Endogenous Growth Model Y = A KaHb L1-a-b