Creating bubbles

As last blog mentioned, Japan had great booming export economy after war. The strict fiscal policies encouraged household to save money. Thus, in this case, Japanese banks had much cash surplus. Eventually, the banking system led to more lenient lending. Japan signed the Plaza Accord in 1985, which tried to weaken the U.S. dollar against the Yen. Japan had healthy trade surpluses. Therefore, Plaza Accord made Yen currency to appreciate against other currencies which decreased Japanese export trading. Meanwhile, it made foreign capital investments relatively inexpensive for Japanese companies. 

Japan became the second largest economy in just a few decades due to the combination of excess liquidity, financial deregulation and the country’s export miracle. This led to overconfidence and over-exuberance. Japanese started to invest other countries, for instance U.S. Nearly $40 billion was invested in risky leveraged buyouts in the USA. Mitsubishi Company bought 51% shares Rockefeller Center. Sony Company acquired Columbia Pictures of Hollywood. Click here watch short video News

In the mid-to-late 1980s, Japan domestic stocks and real estate had aggressive speculation due to overconfidence and loose monetary policy. It pushed the prices of these assets to previously unimaginable level. Japan’s Nikkei stock index achieved 39,000 in 1989, which accounted for more than one third of the world’s stock market capitalization. It played a significant role in boosting stock prices that the keiretsu conglomerates cross-holding each other’s shares. This caused Japanese firm wealth to balloon along with stock prices. Moreover, a majority of Japanese firms practiced “zaitech” ( or called “financial engineering”). Zaitech means that speculative profits and capital gains are reported as income on corporate financial statements. Zaitech-practicing corporations gained low-interest loans and used them to buy stocks and real estate. Obviously, the firms obtained enormous earnings at that moment. In 1989, one survey showed that many people did not believe that the Nikkei was overvalued.

Real estate prices had similar manic action. In Tokyo, the price raised 350 times, which had more expensive than comparable land in Manhattan, New York. 

It was generated astounding amounts of bubble wealth by soaring stock and real estate prices. Some firms or individuals started to invest art market. Western art was more attractive to them. They made new record prices in the art market. In 1987, Vincent van Gogh’s “Sunflowers” was paid almost $40 million by a Japanese insurance company. Ryoei Saito, a paper industry billionaire, paid $82.5 million for another painting of van Gogh, “Dr. Gachet”, which broke the price record.