The Japanese Asset Price Bubble — when Tokyo land outvalued a continent

In Japan during the late 1980s, the prices of stocks and especially land rose to heights that briefly made the country, on paper, the richest place that had ever existed. The Nikkei 225 stock average reached an all-time high of 38,957.44 on 29 December 1989, and Tokyo land grew so dear that the grounds of the Imperial Palace — about 1.15 square kilometers — were estimated to be worth more than all the real estate in the state of California. By the end of 1990 the Nikkei had lost nearly half its value, and over the following decade urban land prices fell by more than 80 percent. The collapse opened what became known as Japan’s “Lost Decades.”

The bubble was not built on a novel asset or amateur speculation but on the bedrock belief of an entire society: that Japanese land never fell in price. In a small, densely populated, fast-growing country, that “land myth” had held for the whole postwar era, and it became the unquestioned collateral on which the banking system rested. Banks lent freely against real estate whose value, everyone agreed, could only rise; companies borrowed against their soaring shares to buy more shares and more land; and a dense web of cross-shareholdings among corporations and their banks meant the whole structure rose and fell together.

The fuel was cheap money. Following the 1985 Plaza Accord, which sharply raised the yen and threatened Japanese exports, the Bank of Japan cut its discount rate to a then-record 2.5 percent and held it there, flooding the economy with credit that surged into stocks and land rather than goods. When a new central bank governor, Yasushi Mieno, set out to crush the speculation and raised rates from 2.5 percent in 1989 to 6 percent by August 1990, the edifice cracked: the Nikkei fell from about 38,915 at the end of 1989 to around 21,900 a year later. The bursting left banks crippled by bad loans, companies and households paying down debt for years, and an economy barely larger two decades on than before — the case that taught the world the phrase “Lost Decade,” and then forced the plural.