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Explaining Asset Bubbles in Japan

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  • Takatoshi Ito
  • Tokuo Iwaisako

Abstract

This paper examines the stock and land price behaviors during the bubble economy period (the second half of the 1980s), paying considerable attention to the linkage of the two markets and the effects of monetary policy. In particular, we examine whether the booms in these asset prices can be justified by changes of the fundamental economic variables such as the interest rates or the growth of the real economy. A complex chain of events is needed to explain the process of asset price inflation and deflation. Our empirical results suggest (i) that the initial increases of asset prices are sown by a sharp increase in bank lending to real estate; (ii) that a considerable comovement between stock and land prices is consistent with a theory that emphasizes the relationship between the collateral value of land and cash flow for constrained firms; (iii) that although the real economy was doing well and the interest rates were still low, asset price increases from mid-1987 to mid-1989 cannot be fully justified by the movement of fundamentals alone; and (iv) the stock price increase in the second half of 1989 and the land price increase in 1990 is not explained by any asset pricing model based on fundamentals or rational bubbles.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5358.

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Date of creation: Nov 1995
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Publication status: published as Bank of Japan, Monetary and Economic Studies. Vol. 14, July, 1996: 143-193.
Handle: RePEc:nbr:nberwo:5358

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  1. Marsh, Terry A & Merton, Robert C, 1986. "Dividend Variability and Variance Bounds Tests for the Rationality ofStock Market Prices," American Economic Review, American Economic Association, American Economic Association, vol. 76(3), pages 483-98, June.
  2. Summers, Lawrence H, 1991. " The Scientific Illusion in Empirical Macroeconomics," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 93(2), pages 129-48.
  3. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1987. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
  4. Kashyap, Anil K & Stein, Jeremy C & Wilcox, David W, 1993. "Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance," American Economic Review, American Economic Association, American Economic Association, vol. 83(1), pages 78-98, March.
  5. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1989. "Corporate structure, liquidity, and investment: evidence from Japanese industrial groups," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 82, Board of Governors of the Federal Reserve System (U.S.).
  6. Sachs, Jeffrey & Boone, Peter, 1988. "Japanese structural adjustment and the balance of payments," Journal of the Japanese and International Economies, Elsevier, vol. 2(3), pages 286-327, September.
  7. Takatoshi Ito & Keiko Nosse Hirono, 1993. "Efficiency of the Tokyo Housing Market," NBER Working Papers 4382, National Bureau of Economic Research, Inc.
  8. Phillips, Peter C B & Ouliaris, S, 1990. "Asymptotic Properties of Residual Based Tests for Cointegration," Econometrica, Econometric Society, Econometric Society, vol. 58(1), pages 165-93, January.
  9. Jeremy C. Stein, 1993. "Prices and Trading Volume in the Housing Market: A Model with Downpayment Effects," NBER Working Papers 4373, National Bureau of Economic Research, Inc.
  10. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, American Economic Association, vol. 71(3), pages 421-36, June.
  11. Froot, Kenneth A, 1989. " New Hope for the Expectations Hypothesis of the Term Structure of Interest Rates," Journal of Finance, American Finance Association, American Finance Association, vol. 44(2), pages 283-305, June.
  12. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 105(2), pages 211-48, April.
  13. Campbell, John, 1991. "A Variance Decomposition for Stock Returns," Scholarly Articles 3207695, Harvard University Department of Economics.
  14. Kenneth D. West, 1986. "A Specification Test for Speculative Bubbles," NBER Working Papers 2067, National Bureau of Economic Research, Inc.
  15. Jeffrey Sachs & Peter Boone, 1988. "Japanese Structural Adjustment and the Balance of Payments," NBER Working Papers 2614, National Bureau of Economic Research, Inc.
  16. Ueda, Kazuo, 1990. "Are Japanese stock prices too high?," Journal of the Japanese and International Economies, Elsevier, vol. 4(4), pages 351-370, December.
  17. Flood, Robert P & Hodrick, Robert J, 1990. "On Testing for Speculative Bubbles," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 4(2), pages 85-101, Spring.
  18. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, American Economic Association, vol. 71(3), pages 393-410, June.
  19. Blanchard, Olivier Jean, 1979. "Speculative bubbles, crashes and rational expectations," Economics Letters, Elsevier, Elsevier, vol. 3(4), pages 387-389.
  20. Takatoshi Ito, 1991. "The Japanese Economy," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262090295, December.
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