The Burst of Bubble and Political Economy of the 1990s Depression
Makotoh Itoh
The Japanese economy changed its features in the 1990's, compared with
the 1980's. It shifted down to an extremely lowered growth trend. Its
continuous depression with economic difficulties has gathered
international concern among the advanced countries. Among the major
causes for such difficulties were clearly the swell of huge bubbles in
speculative trading of shares and real estate in the late 1980's and
the in subsequent collapse. They brought an enormous amount of bad
loans to the Japanese financial institutions generating credit crunch,
deteriorated assets of firms and households, caused continuous
business failures, and a vicious circle of asset deflation.
We saw the swell of bubbles by mobilizing the expansive flexibility of
the credit system and the resultant destructive burst of them not
seldom in the history of capitalist economies. There were for example,
the burst of bubbles in the tulip crisis of 1637 in Netherlands and
the South Sea bubbles incident in 1720 in the UK already in the
nascent period of capitalism, the cyclical crises in the 19th century,
or the great crisis beginning from 1929. In the capitalist world
economy since the late 1980's, the possibility in capitalist economy
to cause speculative bubbles and their burst strongly reappeared. The
Japanese economy could not escape it. Such a process of burst of
speculative bubble may be understood at a certain abstract level by H.
Minsky's post-Keynesian financial instability
hypothesis.\footnote{Minsky, H.P., `The Financial Instability
Hypothesis; A Restatement' (1978) among other essays in Minsky,
H.P.(1982).} According to this hypothesis, most of firms and
individuals in the Japanese economy in the late 1980's must have
started from the position of hedge finance, in which the cash flows
from assets in position are expected to exceed the cash flow
commitments on liabilities for every period. Then more and more of
them moved to speculative finance, in which the cash flows from assets
in the near future term fall short of the near term contracted
payments, but the expected cash receipts in the longer term are
expected to exceed cash payments that are outstanding. Further at the
last phase of speculative development, increasing number of them came
to Ponzi finance, in which the net income from receipts falls short of
interest payments in both the short run and the long run, so as to
increase outstanding debt, expecting a future bonanza as a solution.
However, the general possibility for a capitalist economy to cause
bubbles and their burst, or the hypothetical logic of process of
events is obviously insufficient fully to explain the characteristic
process and the size of destructive damage of financial instability in
the Japanese economy in this period. We have to reconsider also the
roles and functions both of the government and the Bank of Japan in
their fiscal and monetary policies, and of the deepening fiscal crisis
of the State, as well as the possible directions of reconstruction
from the crisis.
4.1 The Swell of Bubbles
We have to examine first why and how the huge bubbles swelled in the
late 1980's Japan. The bubbles were concentrated into the speculative
trading with rising prices of shares and real estate much faster than
the real economic growth. Their features are shown in charts 4-1 and
4-2. While Japanese nominal GDP grew by 1.35 times in 1985-90, the
average share price in Tokyo stock exchange rose by 3 times, and the
average land prices in Tokyo area and three major urban areas rose by
2.5 times. What are the main factors to cause the bubbles?
missing{(Chart 4-1 and 4-2 enter around here)}
4.1.1 Initiating Roles of Monetary and Fiscal Policies
The most direct initiating factor for the bubbles in this period of
Japan was given by the fiscal and monetary policies to expand the
domestic demand after the G5 Plaza meeting accord internationally to
cooperate for revising the excessively high exchange rate of dollar
and the trade imbalance.
The preceding Japanese economic recovery since 1983 largely depended
on the expansion of exports to the US market among others. This was
promoted much by appreciation of dollar, which was caused by massive
international capital flow into the US economy being attracted by a
high rate of interest due to Reaganomics (with the crowding out
effect). After the Plaza accord, the appreciated dollar, which had
been a result of speculative capital flow against the basic balance of
trade, began to fall rapidly. In just 8 months until March 1986, yen
appreciated from 240 yen a dollar to 150 yen as dollar declined. This
gave a serious shock to the Japanese exporting industries, and
generated depression.
However, in this 1986 the Nikkei Dow average of 225 share prices began
to rise from 13,137 yen at the beginning of the year to 18,701 yen at
the end of the year by 42 per cent, though it is seemingly
inconsistent with the depressive real economy. This was the start of
the bubble in share prices as shown in Chart 4-1. A most important
factor to cause this was reduction of interest rate. Following the
Plaza accord, the prime rate of the US Federal Reserve Bank was pulled
down from 7.5 per cent at the beginning of 1986 to 5.5 per cent in
August of that year. Correspondingly, the official rate of the Bank of
Japan was reduced from 5 per cent at the end of 1985 gradually to 3
per cent in November, and further to the unprecedented low rate of 2.5
per cent in February 1997 to be kept there until the Spring 1989. The
requested expansion of domestic demand to mitigate the trade friction
with the USA had to be pushed forward mainly by such a monetary
policy, as operation of fiscal policy was restricted by the government
priority task to solve the cumulative budget crisis of the State. At
the same time, monetary policy to lower the rate of interest was much
facilitated by the floating exchange rate system combined with the
increasing foreign exchange reserve in Japan. Ceteris paribus a fall
in the interest rate elevate the prices of shares and land or the
value of fictitious capitals in inverse proportion through comparison
of efficiency of investment.\footnote{See more in detail in Chapter 5
of Itoh, M. and Lapavitsas, C.(1999).} In fact, share prices began
to rise in New York Stock Exchange, and then also in Tokyo market in
1986. Simultaneously land prices in Japan began also to rise sharply
from Tokyo area as we see in Chart 4-2.
In addition, Japanese government deviated from the tightening fiscal
policy to solve the fiscal crisis from the beginning of the 1980's,
and implemented a large-scaled emergency spending policy in a
supplementary budget of 6 trillion yens and added in main to public
investment in the spring 1987. This was to boost domestic demand in
order to mitigate both the depression after appreciation of yen and
the trade friction with the USA. Local governments were also advised
by the central government to extend the regional re-development
projects such as a plan to construct a littoral sub-center in Tokyo
among others. These policies stimulated developers, real estate
agents, constructing companies, and promoted the rise in prices of
land and other real estate.
The Bank of Japan, like many other central banks, was traditionally
much concerned about keeping the value or purchasing power of its bank
note by avoiding general inflation. The general price level happened
to remain stable in the late 1980's, as import prices of energy and
other materials were rather deflationary due to both the effect of
appreciation of yen and the balance between demand supply in the world
market. Therefore, the Bank of Japan easily continued to supply money
funds to enable banks and other financial institutions to expand loans
for speculative trading of shares and real estate, and did not pay
much attention to the danger of swelling bubbles in prices of shares
and real estate. Resultantly, money supply in Japan, which is composed
from total (M2) of cash, deposit payable on demand, time deposit and
negotiable certificate of deposit (CD), continued double digit annual
growth rates from the second quarter of 1987 until the third quarter
of 1990, much faster than the real economic growth.
4.1.2 The Economic Recovery with Expanding Domestic Demand
Monetary and fiscal policies would not always work to initiate
economic recovery. In the Japanese economy at this phase they managed
to generate expansion of effective demand, beginning from that of the
wealthier persons and business firms, by increasing capital gains with
rising prices of shares and land.
Consumer demand began to expand initially for luxurious expensive
commodities such as sophisticated residential units, big passenger
cars, fur coats and jewels for wealthy persons. Department stores and
other fashionable shops expanded their corners for high-grade
expensive goods with world famous brands. As Japanese firms were
largely restricted to maintain exports by appreciated yen, they
attempted anew to dig up domestic demand for their products by
multiplying models in accord with market trends. It used to be said
that they discovered and were digging up the second largest consumer
market in the world. Expansion of consumer credit with lower rates of
interest often combined with card-system of payment was positively
promoted as a part of such an endeavour.
When prices of houses and land began to be noticed as rising, the
demand for residential units in condominiums, and houses began to
expand rather than to decrease in these years. As there was continuous
shortage of housing units in the Japanese economy in the post World
War II period, especially in urban areas with rapidly growing number
of families, prices of housing units and residential land continuously
rose and did never fall. People believed that residential units and
land are most secure assets to have. For a great number of working
people, it seemed one of greatest tasks in their life to obtain a
housing unit for their family sometime in their career before
retirement. Against these background, once prices of housing units and
residential land began to rise conspicuously, an expectation easily
spread that the earlier the purchase, the bigger the capital gain from
rising asset prices obtainable. Such an expectation moved people more
and more generally beginning from wealthier persons.
More and more the rising prices of residential units and land fostered
the expansion of their demand to gain earlier and more widely. As we
shall see in the next section, banks positively promoted housing loan
since the late 1970's, and swelled it in these years in late
1980's.\footnote{The total amount of Japanese housing loan given in a
year increased from about 17 trillion yens in 1986 to about 28
trillion yens in 1990 (Imura, S. (1997), p.161.). Though it included
both public and private loans, the part of private loans mainly by
banks occupied an overwhelming proportion both in the absolute
amount and in its increment. When Japanese banks began to expand
housing loans in the late 1970's, they initially set up specialized
housing loan companies as non-banks to channel their loans. However,
soon they began to extend housing loan directly so that the
specialized housing loan companies were forced to go on expanding
more risky loans on real estate for business firms.} Beginning from
the third quarter of 1986 until the first quarter of 1988, private
investment in houses continued to surpass its level at the same period
of the previous year. Many people were advised by real estate agencies
and banks to realize capital gains by selling their housing units, and
repurchase new larger units by means of easy housing finance with a
lowered interest rate. Many of them followed the advice and
repurchased also cars, furniture, electric appliances, and apparels
often by means of consumer credit.
At the same time, demand for office rooms also swelled especially in
the metropolitan area. As international activities of firms rapidly
expand, the headquarters of firms seemed better and convenient to
locate at the metropolitan area nearer to the international financial
and business center. Therefore, many companies, which traditionally
had based out of the metropolitan area, especially in Kansai (around
Osaka) area, shifted their headquarters to Tokyo area. As
globalization proceeded, many of foreign companies moved into Tokyo
area and opened their branches or offices. Corresponding to such
movements, construction of office buildings became a boom in these
years, and promoted the rise of land prices beginning from Tokyo area.
The feeling of economic recovery and prosperity thus spread from
constructing industry more generally to manufacturing industries
following the expanded domestic demand. So far as the Japanese firms
relied upon expansion of domestic demand, they could utilize both the
lowered rate of interest and the lowered yen prices of imported raw
materials and oil as favourable conditions for their profitability. As
many of them mutually had shares of companies in the same keiretsu
(groups of business companies) as well as land at book values
purchased, a rise of prices of shares and land formed latent asset
value and strengthened their financial position. Many of Japanese
firm also accumulated idle money fund not just by retained profit but
also by means of equity finance or issuing new shares, convertible
bonds (CB) and warrant bonds (WB) both domestically and
internationally so as to utilize the low rate of interest and
appreciation of yen. They used a part of such money fund to expand
plants and equipment or offices, but spent largely for zaitech
(financial technique) or speculative financial operation to obtain
capital gains by rising prices of shares and real estate. Bubbles of
prices of shares and land were very much accelerated by such zaitech
among capitalist firms.
As the domestic demand expanded, Japanese investment in plants and
equipment was activated after many years of depression, and increased
for three years from the beginning of 1987 by double digit per cent
when compared with the same quarter of the previous year. The Japanese
economy seemed to enjoy recovery and boom throughout almost all
industries including raw material suppliers. The great depression
appeared solving by the domestic market oriented economic growth for
the first time after 1973. The panicky fall of share prices following
the black Monday in October 1987, did not much prevent this expansive
trend in real economy, and passed away as an tentative episode for the
economic recovery. The average annual rate of real economic growth in
the fiscal years during 1987 and 1990 recorded 5.2 per cent.
However, the economic recovery in these years contained fragility and
distortion in its character, as it was led and fostered by the bubbly
swell in asset prices. Certainly the rise in prices of shares and real
estate was not just empty illusion. It caused and reflected the
recovery and growth of real economy to a certain degree. Nevertheless,
so far as it went up far more than the growth of real economy, it
included more and more the fictitious nature sooner or later to
collapse. The expansion of domestic demand led by capital gains from
such fictitious swelling of asset values was also largely fictitious.
Its nature was different from the more steady and substantial growth
of domestic demand based upon the continuous rise of real wages almost
in line with a rise in labour productivity in the period of high
economic growth. Investment in plants and equipment in manufacturing
industries like in the automobile industry was promoted also much by
the bubble economy, and easily increased large production lines to
produce more sophisticated and multiple models by expensive
facilities. This was actually preparing a great difficulty for firms
to cope with the massive and expensive excess capacity in the
subsequent long depression through the 1990's. In the meanwhile,
unlike the speculative boom at the beginning of the 1970's, there was
not much inflation or general rise in prices in this boom in the late
1980's despite of increasing supply of money and credit. This would
make a good counter-example to the quantity theory of money. The
reasons were found in declining yen prices of imported raw materials
and oil, as well as stagnant slowness of the rise in wages, basically
reflecting the balance between demand supply in the global and
domestic market plus the effect of appreciation of yen. Actually the
whole price index continuously fell than the previous year in
1985-88. Against these background the speculative bubbly trading was
more conspicuously concentrated into the stock exchange and the real
estate markets as an outlet for ample and cheap supply of money and
credit.
4.1.3 The Roles of Financial System
In comparison with other advanced countries, the Japanese saving rate
of households has been high. This is an important factual basis to
examine the functions of financial system in Japan. The Japanese
average household saving rate at GNP basis was about 15 per cent in
the period of high economic growth. It rose to 23 per cent in the
middle of the 1990's, and then fell slowly so as to maintain still
about 15 per cent.\footnote{There are two series of statistics on the
rate of saving in the Japanese economy; one is based on the GNP
statistics (S-GNP), and the other is based on the survey of working
households (S-SWH). While these two roughly showed similar
movements, they became rather widely different in the 1980's. We
refer to the motion in S-GDP here, which is lower than S-SWH. The
factors to make the gap are analyzed by Adchi, M.(1993). For
instance, the interest and principal return payment for debt by
households are counted as saving in S-SWH. To certain extent, the
relatively high rate of saving among Japanese households may be
understood in a model as follows. Assume that all the workers spend
five times of their average annual income in order to obtain their
own houses once in their 35 working years. Assume also that their
saving is to be used just for obtaining their own houses either by
purchase or (re-)construction. Then in average they have to save one
seventh or 14.3 per cent of their annual income so as to obtain a
house by the year of retirement. This saving rate roughly matches
the actual number in the text.} There is no definite theory to
explain why it has relatively been high. Historical and institutional
factors such as follows must have worked together.
Namely, as Japanese working people have been worried for the life
after retirement reflecting the insufficient social welfare,
especially with extending average span of life in the nuclear family.
They have been facilitated to save by continuous increase in
disposable household income, the bonus system to receive about 4-6
times of monthly wages twice or three times a year, and the custom of
retirement pay for regular workers often 2-4 times of yearly wages.
They also needed to save to purchase a relatively expensive
residential unit each for their family by the time of their retirement
to settle the housing problem for the rest of their life. In the
period of high economic growth, banks and other financial institutions
could easily collect such household savings with nearly zero real rate
of interest. Main banks for each keiretsu group in cooperation with
other financial institutions poured the collected fund into loans for
investment in plants and equipment of big businesses. This function of
financial institutions pumping the household saving into investment in
plants and equipment formed the so-called over-loan tendency of the
Japanese big businesses, and served as an important basis of high
economic growth in this period.
In the process of economic crisis and restructuring since 1973,
however, such a close relation between banks and big businesses
changed greatly. Along with both transition to the low economic growth
trend and spread of ME information technologies, big businesses
reduced down the scale of investment in plants and equipment.
Correspondingly, they attempted to reduce debt by returning borrowed
fund more and more in order to cut down interest payment as a part of
economizing the costs of operation. Further, in the 1980's the
increasing number of big firms accumulated their own financial assets
more than their financial debt, and thus went through the 'golden
cross' so as to earn net revenue from their financial operation. Such
net financial asset was formed by retained earnings as well as by
equity finance. More and more big firms utilized direct finance,
instead of indirect finance through banks, to obtain monetary fund
directly at capital market by issuing new shares, CB, WB, and SB
(straight bonds) with cheaper costs. Especially in the late 1980's,
with appreciation of yen, international direct finance in terms dollar
often enabled Japanese big firms to obtain monetary fund often with
negative rate of interest or negative costs in terms of yen. When
share prices began continuously rose, direct finance in the form of
equity finance by issuing new shares or some bonds with right to
obtain shares in certain conditions (like CB, and WB) became easier to
use. Thus the amount of money funds obtained by equity finance for the
listed big companies in Tokyo Stock Exchange widely increased from 4
trillion yen in 1983 to 28 trillion yens in
1989.\footnote{Haga,K.(1993),(1994),(1995) present fine analyses of
the Japanese bubble economy in this period with useful statistical
data, to which I owe much in the following related paragraphs.}
In the late 1980's investment in plant and equipment recovered and
increased after many years, but it was around 5 trillion yen in 1987,
and 9.7 trillion yen in 1989 at most. Many of firms could self-finance
such a size of real investment by retained earnings and just a part of
equity finance. Therefore they utilized a large part of huge amount of
monetary fund obtained by equity finance in zaitech speculative
trading of financial asset or real estate beside foreign investment
with speculative trading of foreign currencies. This was a major
source of speculative swell of bubbles. Let us examine some
statistical evidence.
In 1985-89, the total market price of shares of listed companies
swelled from 196 trillion yens to 630 trillion yens (1.6 times of GDP)
by more than three times. In 1985-90, the units of shares listed
increased by 21 per cent or 66.6 million units in real number. Of
these increased shares, business firms obtained 34 per cent, financial
institutions 36 per cent, while individual persons got only 17 per
cent, and investment trusts 17 per cent. Of total existing listed
shares in 1989, financial institutions held 42.3 per cent, business
firms 24.8 per cent, while individual persons occupied only 22.6 per
cent. This shows a characteristic of the Japanese economy as corporate
capitalism, in contrast with the US economy, where individual persons
own almost 60 per cent of existing listed shares. So long as
corporations mutually own continuously a large part of existing
shares, the floating shares in the market are relatively scanty, and
are more easily subject to speculative rise of prices. Into such a
share market, business firms and life insurance companies injected a
large quantity of monetary fund directly or indirectly often in the
form of designated fund trust through trust banks and security
companies. The estimated outstanding amount of such designated fund
trust increased from 5 trillion yens at the end of 1985 to the huge
amount of 37.6 trillion yens at the end of 1989. Apparently the
bubbly swell of share prices in these years in Japan was led by
zaitech speculative trading among big business firms and financial
institutions, though individual persons were also involved. In the
meanwhile Japanese banks tended to loose more and more of big
businesses as borrowing customers. They began to be threatened also by
increasing competition with postal offices and insurance companies to
sell new models of financial commodities to individual households by
means of information technologies.
Therefore, Japanese banks positively expanded their business
activities abroad, especially in the latter half of the 1980's by
utilizing the appreciation of yen. Between the end of 1985 and the end
of 1989, for example, the outstanding amount of Japanese international
banking asset increased widely by 30 per cent at annual average, to
reach 1967 billion dollars. Its share in total international banking
asset sharply increased from 26 per cent to 38 per cent in the same
period. Such rapid expansion of Japanese international banking
operations gathered international financiers' concern and worry if it
include reckless and imprudent loans. Therefore, Bank of
International Settlement (BIS) made up an agreement on capital
adequacy requirements (Basel agreement) in 1988. This agreement
required banks doing international business to maintain own capital
more than 8 per cent of asset (after adjustment according to the
different kinds of asset groups) after the end of 1992. Japanese banks
asked and obtained allowance in the agreement to include 45 per cent
of their latent asset of holding share prices, or the latent capital
gain between current prices and booked old prices of shares they hold,
into own capital. So long as share prices continued to rise, the Basel
agreement seemed easy to clear with such an allowance. Thus Japanese
banks assumed that they can go on to expand loans in accord with the
international common rule in the process of swelling bubble economy.
However, main domestic borrowers for Japanese banks greatly changed
from the big businesses in the previous period of high economic growth
to medium and small businesses, especially in the field of real estate
agencies or constructing companies, non-banks such as specialized
housing finance companies without receiving deposit, and individual
persons. Though there was such substantial change in contents, the
annual average rate of increase of total asset (mainly the remaining
loans) of 151 Japanese major banks (including city banks, regional
banks, and trust banks) rose from 9.6 per cent in 1980-84, to 16.6
per cent in 1985-89. Especially it reached 28.9 per cent in 1989.
While the annual average rate of increase of total loans of those
banks was 12.2 per cent in 1985-89, and 16.1 in 1989, that of loans
to real estate business was 14.1 per cent in 1985-89, and 24.3 per
cent in 1989. The annual rate of increase of loans to non-bank and
other financial business was 30.4 per cent in 1985-89 and 21 per cent
in 1989. According to a survey by the Ministry of Finance, the total
inflow of loans to real estate market at the end of 1991 reached 120
trillion yens. Of those total loans, major banks owned 59 trillion
yens, and non-banks owned 50-55 trillion yens. As the source of the
large part of non-banks' loans was borrowing from the banks, it is
clear that the huge bubble in the form of swelling prices of land and
other real estate was substantially facilitated by the inflow of money
fund or loans directly or indirectly from banks.
The resultant capital gain just by land prices in 1988 amounted to 416
trillion yens, or 1.21 times of GNP of that
year.\footnote{Tsuru, S. (1990) p.5. By the way, so far as the great
part of land was not transacted, the large part of such an amount of
capital gain was just in calculation and in a sense imaginary. As
for the realized part of capital gain, its source may not be
confined within the annual flow of income or surplus value produced
by surplus labour of the society. A significant part of it must
rather be in redistribution of monetary asset as a stock. This can
be applied to the source of capital gain obtained by a rise in share
prices. Conversely, capital loss occurs as destruction of fictitious
asset values, and may not directly mean a minus of income flow or
reduction of surplus value. Marxist theory of surplus value should
not too directly be applied to such gains and losses.} Although the
similar bubbly rise of land prices occurred also in the USA, the
capital gain by land prices remained there just about 3 per cent of
GNP in the same year. In comparison, the Japanese bubble of land
prices was enormous. In about 1989, the total land price in Japan was
estimated as 4 times more than the total land price of the USA. Since
total area of Japan is one twenty-fifth of that of the USA, the
average price of Japanese land would be 100 time more than that of the
USA. The land prices in Tokyo area and other large cities were much
more expensive than the national average.
Including such a rise in already expensive land prices, the average
price of residential units also rose. For instance, the average price
of a condominium unit in the metropolitan area increased from 35.8
million yen in 1987 to 61.2 million yen in 1990 by 71 per cent in just
three years.\footnote{Fudosan Kenkyusho [Research Institute of Real
Estate] (1997).} In comparison with the average annual income of
workers' households in the same metropolitan area, it increased from
5.5 times of annual income to 8 times in these years. |
