Perhaps the most spectacular boom and bust of the last twentieth century involved the Japanese real estate and stock markets. From 1955 to 1990, the value of Japanese real estate increased over 75 times. By 1990 the total value of all Japanese property was estimated at nearly $20 trillion - equal to more than 20 percent of the entire world's wealth and about double the total value of the world's stock markets. America is twenty five times bigger than Japan in terms of physical acreage, and yet Japan's property in 1990 was appraised to be worth more than five times as much as all American property. Theoretically, the Japanese could have bought all the property in America by selling of metropolitan Tokyo. Just selling the Imperial Palace and its grounds at their appraised value would have raised the cash to buy all of California. The tulips were even in full bloom around Japan's gold courses. By 1990, the total value of all golf courses in Japan reached $500 billion, an amount double the value of all equities traded on the Australian stock exchange.
The stock market countered by rising like a helium balloon on a windless day. Stock prices increased 100 fold from 1955 to 1990. At their peak in December 1989, Japanese stocks had a total market value of about $4 trillion, almost 1.5 times the value of all U.S equities and close to 45 percent of the world's equity market capitalisation. Firm foundation investors were aghast at such figures. They read with dismay that Japanese stocks sold at over 60 times earnings, almost 5 times book value and well over 200 times dividends. In contrast, U.S. stocks sold at about 15 times earnings, and London equities at 12 times earnings. The huge prices of Japanese stocks were even more dramatic on a company by company comparison. The value of NTT Corporation, Japan's telephone giant, which was privatised during the boom, exceeded the value of AT&T, IBM, Exxon, General Electric, and General Motors all put together. Dai Ichi Kangyo Bank sold at 56 times earnings which an equivalent U.S. bank, Citicorp, sold at 5.6 times earnings. Nomura Securities, Japan's largest stock broker, sold at a market value exceeding the total value of all U.S. brokerage firms combined.
.......
Much to the distress of those speculators who had concluded that the fundamental laws of financial gravity were not applicable to Japan, Isaac Newton arrived there in 1990. Interestingly, it was the government itself which dropped the apple. The Bank of Japan (Japan's Federal Reserve) saw the ugly spectre of a general inflation stirring among the borrowing frenzy and the liquidity boom underwriting the rise in land and stock prices. The case for tightening credit before a major rise in the general inflation rate rather than afterwards is that the longer the delay, the greater the eventual pain is likely to be in terms of lost economic output and rising unemployment. And so, the central bank restricted credit and engineered a rise in interest rates. The hope was that further rises in property prices would be choked off and the stock market might be eased downwards.
Interest rates, which had already been going up in 1989, rose sharply in 1990. The stock market was no eased down: Instead, it collapsed. The fall was almost as extreme as the U.S. stock-market crash from the end of 1929 to the mid-1932. The Japanese (Nikkei) stock-market index reached a high of almost 40,000 on the last trading day of the decade of the 1980s. By mid-August 1992, the index had declined to 14,309, a drop of about 63 percent. In contrast, the Dow Jones industrial average fell 66 percent from December 1929 to its low in the summer of 1932 (though the decline was 77 percent from the September 1929 level). Of course, in 1932 we suffered a serious depression, whereas the Japanese economy kept rolling along in the 1990s with only normal fluctuations.
.....
It is more difficult to date and measure the collapse in the real estate market since property rarely changes hands. Nevertheless, the air also rushed out of the real estate balloon during the early 1990s. Various measures of land prices and property values indicate a decline roughly as severe as that of the stock market.
