Tuesday, 5 March 2013

The Japanese asset price bubble (1986-1990)

Japan’s domestic policies after World War II urged people to save money. People deposited more of their savings into banks, which made it easier for companies to take out loans and lines of credit. 

By using their lines of credit Japanese companies invested in capital resources, which made them capable of making more goods than international competitors.  Japan had provided high quality products on reasonable prices and its products high demands in world lead it to become a major economic power in world. 

The yen was appreciated and investors made good money off financial markets. Majority of people used easy credit to make property and homes making a speculative real estate bubble. Because of that the real estate prices gone skyward as 1 square foot rate of property in Tokyo was selling at $139,000. Stocks prices were having no limits in rising up, because of reinvestment the economy expanded more. In December 1989 the Nikkei reached all time high of 38,957.44. But in early 1990s Japan’s bubble started to sink. But that haven’t happened in flash of time that happened slowly, stock and real estate values decreased heading to Japan’s “lost decade”. People pulled out their investments and started investing out of Japan because of that Japanese companies lost some advantages of their competitiveness internationally. Low consumption rates coupled with lower output and employment meant steady deflation.

Though the government lower the interest rates to practically nothing that haven’t encourage Japanese people to put money in the banks. The government subsidized banks and businesses at extreme end of failure, supporting up the zombie organizations with little visible benefit to the economy. Finally in 2003 the Nikkei started to climb again. 

Lesson

Surely bubbles look wonderful while growing but when they sink, as they have to sink they pulls back the economy more than a decade.

No comments:

Post a Comment