The Economy of Japan had experience a tremendous growth since the end of the Korean war. The growth of GNP in 1967 and 1968 was above 10 % (double digit growth period) which exceed countries such as Britain, France and Germany. The economy experienced a boost is due to many reasons, such as: enlargement of industrial facilities, massive adaptation of western technology and education, lower the military expense to 1% of GNP, relation with power nation, human resources and their spirit to achieve "zero defect program". But after the first and second oil crisis that occur from 1973 onward. The economy move downwards partially due to the poor management of economic policy. Although the government had attempt to adjust the economic policy but the recovery was slow. As the soaring of yen continues the demand for export has increase tremendously. With the concern of the United State of this problem, president Reagan and the G5 have signed an agreement with Japan called "Plaza Agreement" , the agreement stated that the exchange rate of Japan and Deutschmark can appreciate against the U.S. . Since then the yen value began to appreciate, Japan was going through a period of trade balance adjustment. While Japan is prepare to go through a period of trade balance adjustment, it will also suffer a period of recession, so the government strongly encourage business activities to strengthen the economy in order to prevent backwash effect. It was this event which boost up the GNP and raise the exchange rate. With this exchange rate advantage it stimulate business activity on housing and stock investment which created a bubble economy. During this period almost the entire country was involve in land speculation or other speculate activities. In this essay it will prove that land speculative activities had create many negative impacts to the Japanese society and economy. Firstly, it will describe the cause of land speculation. Secondly it will discuss on the society and political effects in Japan and lastly it will focus on the economy effects, more over it will include the aftermath when the bubble collapse.

The root of this bubble economy is due the wave of land speculation. The wide spread of land speculation activities were mainly because it is profitable. The speculative transactions in assets grew and grew and many believe that this will last for very long period of time. One of the reason that leads to massive investment



in the risky activities is because of the success of the Japanese in the international market during 70*s - 80*s. Many Japanese enterprises and business man had become very wealthy. These people have a large sum of equity to invest. Some of these people have focus on risky asset such as stocks and land, therefore many of the regular ventures were left behind. One of the major cause of the massive transaction in the land market was due the incremental of loans by banks. Financial institution was very positive in lending money to the enterprise. This enhance the accessibility to the land speculate market. Each size of this loan is very large. This is because the size of mortgage in Japan financial institutions are based on the collateral, (house) while in North America 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 than North America. Also 62% of Japanese households own the home that they live and in average the value is near 4 million yen. Therefore there are lots of potential investors. And during the period of speculative activities, borrowers increase the value of their loans as the value of their collateral increases. Since asset is highly liquidate, the number of potential speculators are high and borrowers in Japan were able to get a larger size loan on real estate therefore speculative activities sink into the level of common home owner and large enterprise. Beside the method of calculating mortgage size, another reason why the size of loan was so large is probably that both the bank and the investor were behind the land speculation activity (banking scandal). Investors were paying some key money (sort of a bribe) to financial institution in order to obtain a larger size loan. Therefore many financial institutions were over loan during this period. Another form of raising cash flow for the speculate market was by braking down a loan that obtain from a large financial institution to a specific enterprise, then lend a small piece of this loan to those who was not eligible to obtain a loan from the bank. These companies that act as the funnel will earn a certain amount of interest from these smaller companies (branch effect). Therefore all classes of companies and society can easily access in the speculate market. Other large corporate, construction company, organize crime group and even temple (religious) were also involve in land speculation. Another encouragement to the speculative market was because the government (liberal democratic party) had originally lower the capital gain tax in the early 80*s. Therefore the profit for owner to resale their land was large.


Flaws in government policy also indirectly allow investor to get away of property tax expense. For example some land owner could just plant little crops over a large piece of expensive vacant land in urban city and declare them as agriculture land. As a result they will be tax very little. Therefore the incremental of land speculative activities were due to over size loan, high accessibility to the land speculative market and indirectly by the government flaws.

During the peak of the land speculation there is a quite interesting study of land price in Japan. (1) "If you sell the entire property of Tokyo you can actually buy the entire United state and by just selling the surrounding land of the Imperial palace you can buy Canada." Although it might of been a little over exaggerate, but the point is that the land value in Japan compare to North America is much higher. Since there is no one side of a coin, Land speculation had create many social problems in Japan. Firstly, land speculation had rise the rent and housing cost tremendously. As a result many young couples and low income families were unable to form their own house hold. In average the cost of a house in Tokyo had raise to about 500 million yen. The younger group with low income cannot afford it and the mid age workers may also not able to 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 low amount 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 ending mortgage payment and high cost of housing. In 1990 the births live in Japan was 1.2 million, in fact the number is the lowest since 1893. Many analysts believe that one of the reason that lead to this slow growth of population could be create by high house prices. So Japanese people have stopped having children and large family is rare. Therefore this is one of the causes of Japan is running our of Japanese. This is also a very big social issue of the modern Japanese society but the precedent of the slow growth of population has now move from high housing cost to other social problems. During this period, there were lots of cases regarding on the robbery and suicidal in the police force.

(1) - Wood, "The Bubble Economy", Sidgwick & Jackson, London 1992 pg. 50


This was mainly because of the heavily debts that these police bare and they have no other choice than to attempt to go above the law. Due to the financing problems in the real estate market, it leads to the founding of what is program call "2 generations mortgage plan". The founding of this plan was propose to suit the majority of the white collar in the Japanese society. This plan was develop since 1983 but it became more useful from 1985 onwards and the qualification of this program must be father-son that plan or already living together. (son must be older than 20 and must repay the loan by the age at 70) The size of the mortgage is determined by the borrower, interest is flexible and the applicants must purchase an life insurance in order to protect the risk of un collectible due 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 this type 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 owner but on the other side this person will bare a debt for the entire life and passes on to the next generation. Moreover it may limit on the consumption of the borrower on other composite good. The booms in land prices also discourage people's incentive to work. (2) "Because if any lucky individuals inherited or own a piece of land in metro Tokyo, they will suddenly gain a net worth of 250 to 300 million yen." This amount of money is equivalent to honest man*s life time income plus retire pension. Since may people get rich during this period, the number of middle class income in Japan had tremendously increase. Under these circumstances, many believe they have already achieved the good life therefore people lose the incentive to work hard and get ahead. Therefore it will distort the social structure in Japan and create many problems to the government (taxations). Since the sacrifice and cost of home ownership is so high therefore many Japanese had prefer to rent. Since the demand of rental market increase, it also attracted many investor and speculator. Therefore tenants also suffer from the incremental raise of land price. In Japan, young couples, low income group and the elderly participated as the major group of tenant in Japan. During this period, owners were looking to sell their property for high return and in order to force the tenant to move (after tenant moves landlord can chose higher quality tenant or resale the property for a larger profit) rent rises extremely high. Many elderly were unable to afford such high rent so
(2) - Wood, "The Bubble Economy", Sidgwick & Jackson, London 1992 pg. 61

many were force to move. As a result many had become homeless. In some cases tenant refuses to move so some owner will hire organize gang group to force them out. Some of these unfortunate tenants will give up the hope in home ownership 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 place to work. So either way, home owner ship and tenants suffer from the raise of housing price. The natural populations are not the only civilian of this incident. Many foreign students also suffer from the housing problem. (3) "In 1986, there was a statistic taken over a total number of 8116 foreign students. Apparently only 17% lives in an adequate resident facility." The primary reason was due to the cost of rent, high exchange rate and lastly it was because the local people do not wish to rent their property to foreign student. Student associate had propose to built new resident housing but due to the heat of land speculation (create an increase in the demand of land) and high construction cost, the new residential housing will be very costly. Therefore this new construction will probably raise the rent 2 to 3 times. While the housing problem continues for foreign students from 80 onward the Japanese government had still declare that they (4) "expect a total of 100,000 new foreign student will be coming in during the 21st century." This reflects that the government has pay very little awareness not only on the natural population but also foreign student. Beside foreign students and the natural population,
another group that affects by the high land prices was foreign ambassador. As the price continued to rise (specially in Tokyo), the ambassadors of the lower wealth countries (such as Africa or Uganda ) were force to move their location away from Tokyo due to high rent. Although this problem was reflect to the Japanese government but it was remain un solve. Other side effects of the land speculation was the new residential construction during that era. In (thousand leaf city) many of the new construction area no longer have a large plain or play ground that similar to a traditional residential area.

(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



In one of the Japanese newspaper there is an advertise article that describes their 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 in worker*s resident near their workplace. This resident housing should be similar to hotel where it has an into desk that can wash your cloths, postal service and take your message. Their home should be in some rural or less urban area that 100 km away from work." This reflected that the rise of land value did not just only effect the affordability of the housing but also distort the lifestyle of the Japan workers as it had reflect in the earlier incident of the 2 generations mortgage. (6) "During the bubble economy period the zoning regulation in Tokyo has revise to allow builder to built more capital on the piece of land. So this indirectly rises the potential of building space in Tokyo. It will again raised the real estate value, property taxes and traffic congestion level of the area." According to the (7) "National Land Agency statistic, about half of firms surveyed in the mid to late 1980s responded that they had no development plans for the land that they acquired." They rarely built homes or apartments, but instead constructed office buildings that would bring in steady revenues. From the developer*s point of view, houses and apartment are the least profitable projects. So land would almost never allotted for housing". With land speculation and the shortage supply of new construction on housing the Japanese residents are very difficult to find an affordable place to live beside the houses that are very far from work place. In the current Japan election the percentage of participant voters in Japan has drop below 60% of the total population and the liberal democractic did not receive 50 % of the seat through election. This percentage was the lowest since WWII and mainly was because the populations in Japan no longer believe the liberal democratic party can bring them back from recession. Also they did not have a good control system during the bubble economy, failure of the recovery program after the bubble splash.(program such as expansion in public investment, lowering the interest rate and series of economic counter measure but the yen is still pretty high which discourage export) In more specific, during the bubble economy the government did not really propose
(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

an effective tax law until 1990. (National Land Value Tax- prohibitive tax on profits from the sale or transfer of land national land law 1974) This revitalizes the local property tax and assessment ratio for the fixed asset tax. Another official policy was issue during 1990 was through the financial market in which the government regulates on the loan activity. This eventually slow down the loan activities largely in 1991. But still the government really lagged their response for those who already suffer for 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 organize gang group and large enterprise in order for these people to be more conveniently to have more benefits in the land market. One incident is involve by a business man Kyowa and a cabinet minister Fumio Abe, where Abe sold the details of where a new road construction in Hokkaido in return for 480 million yen. Political scandal was expose to the public not long after the bubble economy was splash. Lastly, most of the asset of the politicians are in the real estate market therefore neither the bank or the officials admit the fall in land prices. So when this incident was expose to the public, the prices of land fall sharply around 50 %. And mainly because of the period of cover up. So many big and small investors suddenly woke up from their happy dreams and face the horrible reality. With the above reasons the government has lost the trust of many Japanese. Therefore the land speculate activities had also effect the image of the strong liberal democratic. During the bubble splash period, many pre-graduates and graduated university students were unable to find jobs in the labor market due to the diet all companies therefore many students were frustrate about their future. Therefore the supply of the labor market is distorted by the bubble burst. Therefore you can see that the land speculation activities had create many social problems to the Japan society during the bubble period and after the bubble burst.

During the bubble period the economy was strongly boost by the sudden rise of land value and stock market. On the other hand the after math of the bubble splash was a pain for the economy. In general we will look at the effects on the rise and fall of the Japan*s economy.




In 1985 the trade balance in Japan need to have adjustment therefore the government declare that it needs some force to grow in order to prevent recession during this adjustment period. (8) "In 1989 the GNP has increased by 481,000,000,000,000 yen and this was mainly due to the speculate market." (People put their profit from land to stock market or vice versa) Many companies were mainly focus on the speculate market. (9) "The Tokyo Stock exchange soared to almost 40,000 points, the value of stock and land was far above the real value and value of property was not rise due to its demand but was due to speculation. Eventually when the bubble splash, the vacancy rate went rocket high 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 of what happen during the bubble economy. During the golden period of land speculation, many investors know that the land market in Japan was limited (due to the potential and limited geographic area) so they began to purchase land over sea in Hawaii. (10) "The Non water front housing price in Hawaii during 1987 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 1987 the land prices was estimate has rise over 60.2% and many tenants have suddenly realize that the rent has tremendously increase and cannot afford it, so many people have no place to stay (especially the elder). There are several reasons that Japanese wants to invest in Hawaii such as; the waterfront view is similar to Japan so it will be a good place for vacation and retirement, the distance between Japan is relatively close ( 3 hours trip by plane) and massive left over of equity and advantages in the exchange rate that has tremendously increase the nominal value of their equity so it is an encouragement for investment. Therefore the wave of land speculation did not only distort the land market in Japan but also affected foreign country.

(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 email address: [email protected]


Looking back at the Japanese economy (11) "in 1987, 77 out of the top 100 most heavily taxed people were involve in land speculation (either have resale their lands or have large land properties). This created a very unhealthy economy because most of the economy is depend on the land market and if any thing happen to the land market, it will distort the economy greatly. (12) "In 1989 the top 100 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 of the profitability in the land market. Since many enterprises only focus on speculate 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 in nominal GNP has created massive appreciate of yen, which had tremendously affect the export businesses and the manufacture industries. (the nominal price of the good has increase therefore foreigner has less interest on Japan goods but this mainly effect small and medium enterprise) While some export business was not doing too well, consequently the workers are not getting an appropriate rise in income. (13) "In 1986 (Nissan) several of the high executive had experience an income cut by 5 to 10% and many of them are very frustrated because most of these people were in their 40*s and have to pay for mortgages and children*s tuition. In later years Nissan had announced to cut 500 in order to balance out their lost." Therefore large manufacture as Nissan was not doing so well during this 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 down during the mid 80*s and as the wave of income cuts continued, every level and class of the employees were involve. On the other hand the high exchange rate was really an advantage for importer (same value buy more) such as energy, petroleum and primary material. These companies were suddenly becoming so wealthy and the income of their employees were much higher compare to those working in the export enterprise. Therefore there was a large gap on the profit and income between the two distinct groups of company and it was very unhealthy for the white collar.


(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


This period of high exchange rate continues until the bubble burst. The decline of the bubble economy occurs during the Gulf war period, the economy in Japan was 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 speculation market and land prices fall continuously. The real estate market is totally frozen. The National Land Agency measures that land price of Tokyo and Osaka has dropped 30 to 50 percent. (Total land wealth is near 2000 trillion yen which is really a lot) Many real estate properties were unable to be resale and at the time many companies were unable to pay such high interest payment therefore many of them went bankrupt. While the banks rarely make any loan, many companies cut back 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 size enterprise which lack of its separate bank center. Large enterprises with separate bank center also suffer from non performing loans by the borrowers (small and medium size enterprise). Others large lending institution also suffer largely, since the major economic powers at the bubble period was on the land market therefore any decline in land values would strongly influence the balance sheets of Japan*s lending institution. As reported in June 18 1996 The News Times International News that the (14) "parliament approves a $ 6. 3 billion bailout for bankrupt housing lenders. The vote clears the way for the establishment of an institution to liquidate the assets of the housing lender which collapsed under bad loans made to real estate speculators before Japanese land prices plummeted in the early 1990s. The seven companies are believed to have more than $65 billion in bad debts." This $.6.3 billion is only a piece of the big picture because (15) "the Finance Ministry said that Japan*s financial institutions held about $324 billion in bad loans as of March 31 1996. Analysts believe the total could be considerable higher. The government in recent days has been working to persuade banks and farm cooperative to agree to take on a bigger share of the bailout burden
to reduce the cost to taxpayer". According to a current financial post in Tokyo: (16) "Most of the financial banks declare yesterday that with the experience of deficit in last year, this year (ended till September) they had turn deficit into net profit.
(14) - Kenneth V. Smith, "Inman News", June 1996 Version, Section B4 email address: [email protected]
(15) - Kenneth V. Smith, "Inman News", June 1996 Version, Section B4 email address: [email protected]
(16) - Herman Li, "Sing Tao News", November 23 1996, Toronto, Section B 12

Banks had systematically write off many of the un collectible accounts. But their revenue is still not very high because of low interest rate and the incremental of bad debts. Therefore financial institution will still probably experience quite a long period of recession." Therefore residue effects of the land speculation spill over still continues. Land developers also suffer largely. Before the land market crash was expose to the public, there were nearly 1,200 golf course was either approve or under construction. Many pre-member ships were sold but unfortunately many of the construction are never finish because of banks were pulling back the loan. At peak, the total value of golf 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 the economy. Another aftermath of the bubble burst is the high vacancy rate in the office buildings in Tokyo. During the late 1980*s, the new constructing rate (for the office buildings) was double compare with the tradition. After the bubble burst, the value of asset decreases and demand for space also decreases. Therefore many office buildings are unoccupied. As you can see, the after math of the bubble burst did not only affect the business enterprise, government but also the grass root people. (17) "In last year the economic growth rate was only around 1% or less and the government had introduce economic revitalization policies such as lowest ever interest rates and increased public investment but judging by the fact that consumer demand has cooled off and capital investment by the corporate sector is not making headway as expected therefore the outlook for economic recovery in Japan remain hazy". The bubble bursting has affected everyone in Japan. (18) "The country has clearly become a victim of the same wrenching process of debt deflation that had already been visible for several years in so many other economies. Japan faces the reality of outright deflation in terms of falling prices. With all that implies for companies inability to maintain their profit margins. Japan was facing by the autumn of 1993 an unpleasant combination of excess production capacity, falling demand and a rampantly high yen. By August 1993 wholesale prices were declining at an annualized rate of 4.2 percent." Once again you can see that many Japanese are not very optimistic about the future economy.
(17) Wood, "The Bubble Economy", Sidgwick & Jackson, London 1992 pg. 205
(18) Wood, "The Bubble Economy", Sidgwick & Jackson, London 1992 pg. 206



Therefore you can see that the land speculation had create many negative impacts to the Japan economy not only during the bubble period but also after the bubble burst.


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