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Explaining Asset Bubbles in Japan

  • Takatoshi Ito

    (Senior Advisor, Research Department, International Monetary Fund)

  • Tokuo Iwaisako

    (Ph.D. candidate, Department of Economics, Harvard University)

This paper examines the behavior of stock and land prices during the bubble economy of 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 first examine whether the boom in asset prices can be justified by changes in fundamental economic variables such as interest rates and growth of the real economy,analyzing a complex chain of events behind the process of asset price inflation and deflation.Our empirical results suggest: (i)that the initial rise in asset prices was caused by a sharp increase in bank lending to the real estate sector; (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 of credit-constrained firms; (iii)that a booming economy and low interest rates from mid-1987 to mid-1989 explain only a part of asset price inflation; and (iv)that the stock price increase in the second half of 1989 and the land price increase in 1990 are not explained by any asset pricing model based on fundamentals or rational bubbles.

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Article provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.

Volume (Year): 14 (1996)
Issue (Month): 1 (July)
Pages: 143-193

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Handle: RePEc:ime:imemes:v:14:y:1996:i:1:p:143-193
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  1. Anil K. Kashyap & Jeremy C. Stein & David W. Wilcox, 1991. "Monetary policy and credit conditions: evidence from the composition of external finance," Finance and Economics Discussion Series 154, Board of Governors of the Federal Reserve System (U.S.).
  2. West, Kenneth D, 1987. "A Specification Test for Speculative Bubbles," The Quarterly Journal of Economics, MIT Press, vol. 102(3), pages 553-80, August.
  3. Marsh, Terry A. & Merton, Robert C., 1984. "Dividend variability and variance bounds tests for the rationality of stock market prices," Working papers 1584-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  4. Froot, Kenneth A, 1989. " New Hope for the Expectations Hypothesis of the Term Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 44(2), pages 283-305, June.
  5. Peter C.B. Phillips & Sam Ouliaris, 1987. "Asymptotic Properties of Residual Based Tests for Cointegration," Cowles Foundation Discussion Papers 847R, Cowles Foundation for Research in Economics, Yale University, revised Jul 1988.
  6. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, vol. 71(3), pages 421-36, June.
  7. John Y. Campbell, 1990. "A Variance Decomposition for Stock Returns," NBER Working Papers 3246, National Bureau of Economic Research, Inc.
  8. Takatoshi Ito, 1991. "The Japanese Economy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262090295, June.
  9. 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.
  10. Takatoshi Ito & Keiko Nosse Hirono, 1993. "Efficiency of the Tokyo Housing Market," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 11(1), pages 1-32, July.
  11. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1987. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
  12. Jeffrey Sachs & Peter Boone, 1988. "Japanese Structural Adjustment and the Balance of Payments," NBER Working Papers 2614, National Bureau of Economic Research, Inc.
  13. Stein, Jeremy C, 1995. "Prices and Trading Volume in the Housing Market: A Model with Down-Payment Effects," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 379-406, May.
  14. Flood, Robert P & Hodrick, Robert J, 1990. "On Testing for Speculative Bubbles," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 85-101, Spring.
  15. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1989. "Corporate structure, liquidity, and investment: evidence from Japanese industrial groups," Finance and Economics Discussion Series 82, Board of Governors of the Federal Reserve System (U.S.).
  16. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  17. Ueda, Kazuo, 1990. "Are Japanese stock prices too high?," Journal of the Japanese and International Economies, Elsevier, vol. 4(4), pages 351-370, December.
  18. Summers, Lawrence H, 1991. " The Scientific Illusion in Empirical Macroeconomics," Scandinavian Journal of Economics, Wiley Blackwell, vol. 93(2), pages 129-48.
  19. Blanchard, Olivier Jean, 1979. "Speculative bubbles, crashes and rational expectations," Economics Letters, Elsevier, vol. 3(4), pages 387-389.
  20. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-48, April.
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