Lecturer: Mr. Don Walshe
The Cure and the Cause:
The Monetary Policy surrounding the Japanese Asset Price Bubble.
Student Name: Louise Fitzgerald
Student Number: 110330341
The Japanese Asset Price Bubble of the late eighties bears a lot of semblance to the recent UK/US Financial Crisis. A boom and bust in the stock and housing markets, an excessive amount of bad lending by banks and economic growth that had stopped are some of the prevailing conditions that led to the crisis. This was combatted with ineffective policy measures by the Government and Financial Authorities. These policies led to ‘The Lost Decade’ in Japanese economics. In this essay, I will outline the conditions …show more content…
However, in the 1980s this trend seemed to change. More people began to hold money in capital markets than in the banks. Bank behaviour began to get more aggressive as corporates were able to acquire financing easier through capital markets and the issuance of bonds. Banks began to push loans to smaller companies and individuals that were back with property. This seemed to have an adverse reaction to the Asset Bubble. Cheap loans became available due to the reduced cost of capital. Increasing asset prices meant that people could borrow more as their collateral value …show more content…
In 1986 in Osaka and Tokyo, land prices for commercial properties had rose 35% and 112% respectively in comparison to the previous year. In the period from 1985 to 1991, commercial property prices had risen over 300%. In 1988, the first sign that the Property bubble may be about to collapse happened when land prices in Tokyo peaked for non-prime land, with some prices of residential land falling by a relatively small margin.
By 1989, the new Governor of the bank of Japan became concerned that the economy was threatened by inflation. Conscious of the fact that past episodes of inflation in the country (post-WW2) had led to an inflation of a 20-fold increase in prices, Japan began to tighten the monetary policy that it had eased not 5 years ago by hiking interest rates. This however seems to have little or no impact on the asset prices, which continued to appreciate until the early 1990s.
The Property and Stock Market Bubbles burst. By 1991 all property prices had reached their peak and in early 1992 the bubble collapse was officially declared as this was the period in which asset prices deteriorated the most, falling on average of 19%. The Nikkei began to plummet and by the end of December 1992, it was off its peak by over 50%.
The Cure: The Policy Measures used the restore