Housing (Land Price) Bubbles, Government Responses, and Economic/Corporate Adjustments in Japan Tomomi Miyazaki Graduate School of Economics, Kobe University
Issues to be Discussed Today 1. Land price bubbles in Japan The emergence of the land price bubble in the late 1980s 2. The collapse of bubble The cause of the burst of the bubble, understood from the policy appraisal (The discussions in the first and second parts are mainly based on Asako (2012)) 3. Fiscal policy and corporate sector s response in the post-bubble periods The explanation of fiscal policy in the 1990s, and the subsequent policy effects on corporate investment 4. Concluding Remarks
1. Land Price Bubbles in Japan Land prices in Japan (Figure 1) during the second half of the 1980s were the highest in two decades. The gap between actual and theoretical land prices were particularly wide during 1986 1989 (Economic Survey of Japan, 1988 and 1989). Too high relative to the levels consistent with market fundamentals (land prices = bubble!)
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Yen/ m2 800,000 Figure 1. Land Prices in Japan (Source: http://www.chika-data.com/) Land price (national average) 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0
The Cause of Bubbles One possible reason: easy monetary policy by the Bank of Japan (BOJ). 1. The official document rate: dropped five times beginning in January 1986. 2. It remained at 2.5 % for 27 months from February 1987 to May 1989. (See Figure 2) These excessive monetary loosening policies were one cause of the bubble in the late 1980s in Japan (Asako (2000) and Asako (2012)).
1985,1 1985,4 1985,7 1985,10 1986,1 1986,4 1986,7 1986,10 1987,1 1987,4 1987,7 1987,10 1988,1 1988,4 1988,7 1988,10 1989,1 1989,4 1989,7 1989,10 1990,1 1990,4 1990,7 1990,10 1991,1 1991,4 1991,7 1991,10 1992,1 1992,4 1992,7 1992,10 1993,1 1993,4 1993,7 1993,10 1994,1 1994,4 1994,7 1994,10 1995,1 1995,4 1995,7 1995,10 Figure 2. Official Document Rate (BOJ) (Source: Nikkei NEEDS) % Official document rate (1985:1 1995:12) 7 6 5 4 3 2 1 0
2. The Collapse of the Bubble The concern around the bubble: both the Japanese government and BOJ adopted certain austerity measures (Asako (2012)). 1. Raising the official document rate (see also Fig.2) 2. Imposing quantitative restrictions on real estate lending 3. Announcing a series of reforms in the land-tax system (e.g., the introduction of land-value tax) 4. Expanding the designation of districts where regulates the land transactions.
These tightening policies led the bubble to burst! 1. The impact of the bubble burst became strongly apparent in 1992, when land prices were drastically falling (Figure 1). 2. It led to the possibility of credit uncertainty in financial institutions holding large volumes of loans secured by land. 3. Negative wealth effects were caused by a sharp fall in the land prices. Private demand, especially corporate investment, fell in the beginning of the 1990s (Figure 3).
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Figure 3. The Movement of Corporate Investment (Source: SNA, Percentage changes from previous year, including the construction in progress) % Manufacturing Real Estate Construction Services Finance and Insurance 50 40 30 20 10 0-10 -20-30 -40
3. Fiscal Policy in the 1990s Expansionary fiscal policy was implemented in almost every year of the 1990s (Table 1). In most cases, public investment (public capital formation) was employed. (Public Finance Act: prohibits the issue of deficit bond in principle, conditionally admits the issue of construction bond) Usually, public investment has two effects on the corporate (private) investment. 1. Crowding in effects: stimulate the corporate sector investment. 2. Crowding out effects: decrease it. Which effect is observed?
Table 1. Chronology of Economic Stimulus Packages and Tax Cuts in the 1990s (Miyazaki (2010)) Stimulus packages Tax cuts Date of announcement Date of announcement Date of implementation August 1992 April 1993 April 1993 September 1993 February 1994 February 1994 September 1994 April 1995 December 1995 September 1995 December 1997 December 1993 & June 1994 July 1994 & December 1994 January 1995, June1995, & December 1995 June 1996 & December 1996 February 1998, June 1998, December 1998, and June 1999 April 1998 April 1998 August 1998 November 1998 November 1999
Study by Table 2. Previous Studies on Crowding in/out effect in Japan (Kozuka et al. (2012)) Mitsui et al. (1995) Economic Planning Agency (1998) Estimation Method Simulation VAR (6 Sample periods FY1957-1987 FY1957-FY1970 FY1971-FY1987 1970Q3-1989Q4 1970Q3-1997Q1 Results In Out Out Study by Nakazato and Konishi (2004) Kitaura and Nagumo (2004) Estimation Method VAR (5 VAR (7 Sample periods Results 1981Q2-2001Q1 Out 1981Q2-2003Q3 1981Q2-1992Q2 Out 1992Q3-2003Q3 Kamoi and Tachibanaki (2001) Ihori et al. (2003) Nakazawa et al. (2001) VAR (6 VAR (6 VAR (7 1975Q1-1990Q4 1985Q1-1998Q4 1960Q1-1989Q4 1990Q1-1999Q4 1980Q1-2001Q4? In Out? Out Fujii (2008) Hatano (2008) Eguchi and Hiraga (2009) VAR (4 VECM VAR (5 1978Q1-2005Q2 Out FY1955-FY2004 In 1969Q1-2008Q1 Out Kawade et al. (2004) VAR (6 1975Q1-1988Q4 1989Q1-2002Q4 In? Kato (2010) VAR (6 1980Q1-1991Q1 In 1991Q2-2008Q1 Out
Evidence from Some Previous Studies Crowding out effect: observed in most cases in Japan. (Table 2) In particular, this is prominent in cases that include the 1990s in the sample periods. Miyazaki (2010): A mixed VAR/event study approach (narrative approach) is used for investigation. To capture policy effects, Miyazaki (2010) uses dummy variables to capture policy changes, following the chronology shown in Table 1. 1. Throughout the 1990s, negative responses of private investment to the fiscal expansion were observed. 2. In particular, in the late 1990s, investment, especially nonresidential investment, decreased. Crowding out effects were definitely observed in the 1990s!
4. Concluding Remarks 1. We discussed the generating and bursting process of land price bubbles in the late 1980s in Japan. 2. In addition, we presented the results of past research on Japanese fiscal policy in the post-bubble periods. 3. Policy effects: not positive for corporate investment (private capital formation) 4. Fiscal policy in the 1990s: inadequate for stimulating the corporate sector incentive and resulted in a large amount of debt outstanding (Figure 4).
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Figure 4. Comparison of Government Debt Outstanding, as a proportion of GDP among Some Developed Countries (Source: Ministry of Finance, Japan) % 180 Japan US UK Germany France 160 140 120 100 80 60 40 20 0 Year
Message (I) Monetary loosening policies sometimes may cause asset price bubbles (affirmed by lessons from the late 1980s in Japan). The austerity measures deployed in rapid sequence contributed to the bubble burst. Policymakers may be required to deal with the bubble boom gradually if they confirm evidence of a bubble developing. (If not, the policy maker will make the same mistake the Japanese government did )
Message (II) Public investment: often part of the stimulus packages implemented after the 2008 global financial crisis. It has asymmetric effects on private investment. The government should carefully craft policy based on the movement of public and private investment.
References (Some Papers and Books Referred in the Slide) Asako, K., 2000. Macro anteika seisaku to nihon keizai (Macro stabilization policy and the Japanese economy). Iwanami Shoten (in Japanese). Asako, K., 2012. Studies on the Japanese Business Cycle. Maruzen Publishing. Kozuka, M., Hiraga, K., Fujii, T., 2012. Zaisei seisaku to crowding out ni kansuru jissho bunseki: Tenbo (Perspective on the fiscal policy and crowding out effects). Kokumin Keizai Zasshi 205 (4), pp.71-82. Miyazaki, T., 2010. The effects of fiscal policy in the 1990s in Japan: A VAR analysis with event studies. Japan and the World Economy 22 (2), pp.80-87.