# Japan's asset bubble: credit orders, land, stocks, and the Nikkei

The bubble phase as the book frames it: low rates, quota-driven bank lending, land speculation, the Nikkei peak, Mieno’s tightening, and the turn from boom to collapse.

*This story parallel: Asset stripping and the corporate raiders*
*This story part of: Princes of the Yen: Japan built, bubbled, and broken*
*This story part of: Land and resources*

## 1985 to 1987 — Yen rises 106 percent

Despite enormous Japanese capital outflows, the yen strengthened sharply, rising 106 percent from 1985 to 1987, which the author calls part of the Great Yen Illusion.

> "Despite the enormous capital outflows, the yen did not weaken. To the contrary, it rose 106 percent from 1985 to 1987.29"
> — Princes of the Yen

## January 1985 to December 1989 — Japanese asset price bubble inflates

From January 1985 to December 1989 Japanese stocks rose 240 percent and land prices 245 percent, driving land valuations to levels where the Imperial Palace grounds were notionally worth as much as all of California.

> "Between January 1985 and December 1989, stocks rose 240 percent and land prices 245 percent."
> — Princes of the Yen

## 1986 to 1987 — BoJ orders banks to expand lending during the bubble

According to bank officer testimony, especially in 1986 and 1987 the Bank of Japan used window guidance to push banks to lend more than they wanted, telling them to use larger quotas because of the recession.

> "Especially in 1986 and 1987, for around one year, the Bank of Japan said: ‘Use more, because we have a recession.’ Window guidance can be used not just to make borrowing smaller, but also to make it bigger."
> — Princes of the Yen

## 1986 — Mieno warns the Diet about excess money

In 1986, as the bubble began under his own window guidance, Deputy Governor Mieno testified to the Diet that he was worried about excess money (kane amari) in the economy, creating what the author calls an alibi.

> "Already in 1986, when the bubble was started by Mieno’s window guidance, Deputy Governor Mieno testified to the Diet that he was worried about the problem of excess money in the economy (kane amari).40"
> — Princes of the Yen

## September 1986 to May 1989 — Fukui heads the Banking Department during the bubble

From September 1986 to May 1989 Toshihiko Fukui headed the Bank of Japan's Banking Department, administering the window guidance credit controls during the bubble years while being groomed as the next 'prince.'

> "From September 1986 to May 1989, longer than average, the head of the Banking Department was Toshihiko Fukui."
> — Princes of the Yen

## December 1986 — Window guidance quotas tightened amid land price surge

The Nikkei reported in December 1986 that window guidance quotas were tightening and that the BoJ was aware of surging land prices, excess liquidity, and strong bank lending to the real estate sector.

> "December 1986: Window guidance quotas tighten. The Bank of Japan is aware of the surge in land prices, the high growth of the money supply, excess liquidity (kane amari), and the strong expansion of bank lending toward the real estate sector.16"
> — Princes of the Yen

## c. 1986 — Banks aggressively expand credit creation

From about 1986 Japanese banks aggressively expanded credit creation, with city bank loan growth averaging about 15 percent in the late 1980s while national income grew only half as fast, fueling unproductive speculation.

> "From about 1986 onward, banks increased credit creation aggressively. Loan growth of the city banks averaged about 15 percent in the late 1980s, and total loan growth remained above 12 percent most of the time."
> — Princes of the Yen

## c. 1986 to 1990 — Japanese capital floods world markets

From around 1986 until 1990, unprecedented Japanese overseas investment flowed into real estate and corporate takeovers worldwide; in 1987 net long-term foreign investment was almost twice the record current account surplus.

> "From around 1986 until 1990, Japanese money flooded the world. From real estate in New York, Hawaii, and Australia to corporate takeovers in the United States, Europe, and Asia, Japanese money seemed to buy up the planet."
> — Princes of the Yen

## 1987 — Record Japanese long-term capital outflows

Japanese long-term capital outflows exploded from $65 billion in 1985 to a record $137 billion in 1987, nearly twice the record current account surplus, dominating world capital flows.

> "In 1987 another record was set when a tide of $137 billion swept over the exchanges, followed by outflows of $ 131 billion the following year. In 1987 the net long-term capital outflows were almost twice as large as the already record-breaking current account surplus."
> — Princes of the Yen

## February 1987 — Executive Board cuts the discount rate to 2.5 percent

In February 1987, under Ministry of Finance pressure, the Bank of Japan's Executive Board decided to reduce the official discount rate to the low rate of 2.5 percent.

> "In February 1987, the Executive Board decided, under MoF pressure, to reduce the ODR to the low rate of 2.5 percent."
> — Princes of the Yen

## February 1987 to May 1989 — Official discount rate held at 2.5 percent

The Bank of Japan maintained a low official discount rate of 2.5 percent from February 1987 to May 1989, often cited as the cause of the bubble, though the author argues interest rates had no stable relationship with asset prices.

> "It is often said that the low official discount rate of 2.5 percent, maintained from February 1987 to May 1989, was the cause of the bubble."
> — Princes of the Yen

## July 1987 — Fukui defends expanding bank loans in Nikkei interview

In July 1987, just after setting off the bubble as head of the Banking Department, Toshihiko Fukui told the Nikkei Financial Daily that the BoJ would not tighten loan quantities, justifying loan expansion by the need for long-term structural adjustment.

> "When Toshihiko Fukui was head of the Banking Department, he was interviewed by the Japanese-language Nikkei Financial Daily in July 1987, just after he had kicked off the bubble."
> — Princes of the Yen

## July 1987 — Fukui endorses continued monetary easing to implement structural reform

In July 1987, shortly after the second Maekawa report, Toshihiko Fukui, head of the department implementing window guidance, said the right central bank policy for structural transformation was to continue monetary easing and expand bank loans.

> "We saw above that the head of the department that implemented window guidance credit controls, Toshihiko Fukui, had said in July 1987, soon after the publication of the second Maekawa report, that suitable central bank policy to implement the structural transformation of Japan’s economy was to “continue with the monetary easing policy” and, explicitly, for “bank loans to expand.”"
> — Princes of the Yen

## 1988 to 1989 — Window guidance begins tightening before Mieno's governorship

Window guidance was already tightening in 1988 and 1989, well before Mieno officially became governor, while Governor Sumita knew little about the policy reversal.

> "Window guidance was already tightening in 1988 and 1989, well before Mieno became official governor.32"
> — Princes of the Yen

## 1989 — Banks suddenly restrict loan growth

In mid-1989 Japanese banks suddenly restricted loan growth, cutting off the flow of new money into asset markets; stock prices peaked half a year later and land prices stopped rising.

> "In mid-1989, banks suddenly restricted loan growth. Half a year later, stock prices peaked. Then land prices stopped rising."
> — Princes of the Yen

## 1989 — Bubble lending reaches 27 percent of all bank loans

By the end of 1989, loans to real estate, construction, and nonbank financial institutions used for speculation totaled 27 percent of all bank loans, some 98.9 trillion yen or 25 percent of nominal GDP.

> "In total, “bubble” loans already summed up to 27 percent of total loans, an absolute sum of ¥98.9 trillion or 25 percent of 1989 nominal GDP."
> — Princes of the Yen

## 1989 — Death of Haruo Maekawa

Former Bank of Japan governor Haruo Maekawa died in 1989, but his chosen successors Mieno and Fukui remained in power at the central bank.

> "Maekawa passed away in 1989, but his successors remained in power."
> — Princes of the Yen

## 1989 — Mieno appointed governor of the Bank of Japan

Yasushi Mieno was appointed official governor of the Bank of Japan in 1989, with observers noting parallels between his career and that of former governor Sasaki.

> "On the occasion of Mieno’s appointment as official governor of the Bank of Japan in 1989, an informed Nikkei reporter pointed out many of the parallels between Mieno’s and Sasaki’s career: “Sasaki formed factions with his ‘tori maki’ followers and was criticized for a closed, secretive system (for instance, by an executive director at the time)."
> — Princes of the Yen

## 1989 — Peak of the Japanese asset bubble

By 1989 speculative credit had pushed asset prices to extremes: the land surrounding the Imperial Palace in Tokyo had the same market value as the entire state of California.

> "In 1989, the little plot of land surrounding the Imperial Palace in Tokyo had the same market value as the entire state of California. It was a bubble."
> — Princes of the Yen

## 1989 — Yasushi Mieno becomes Bank of Japan governor

Yasushi Mieno became governor of the Bank of Japan in 1989, with Haruo Maekawa having become governor ten years earlier; both had long been tipped as certain successors.

> "The same unanimous case was made by the media and well-informed observers before Yasushi Mieno became governor in 1989, and ten years before that, when Haruo Maekawa became governor."
> — Princes of the Yen

## June 1989 — BoJ tightens window guidance and ends the bubble

The Bank of Japan ended the bubble by suddenly tightening its window guidance credit controls in June 1989, an act the author identifies as the trigger of the recession of the 1990s.

> "It was the Bank of Japan that ended the bubble by suddenly tightening window guidance in June 1989 and then created the recession of the 1990s.1"
> — Princes of the Yen

## December 1989 to 1994 — Mieno becomes BoJ governor

Yasushi Mieno served as governor of the Bank of Japan from December 1989 to 1994, determined to end the bubble he blamed for dividing Japan into haves and have-nots.

> "This is similar to the picture painted of Yasushi Mieno, governor of the Bank of Japan from December 1989 to 1994."
> — Princes of the Yen

## December 1989 — Mieno's 'Christmas present' rate hike ends the bubble

Only a fortnight after becoming governor, Mieno raised the official discount rate in December 1989, the infamous Christmas present; asset prices began tumbling in 1990 and land prices eventually fell around 80 percent.

> "He decided to end the bubble and raised the official discount rate only a fortnight after becoming governor, delivering the infamous “Christmas present” of 1989. Asset prices, led by stock prices, began to tumble in 1990."
> — Princes of the Yen

## December 1989 — Nikkei peaks at all-time high of 38,915

After rising an average 30 percent per year from 1984, the Nikkei 225 stock index peaked at an all-time high of 38,915 yen in December 1989.

> "From 1984 to 1989, the Nikkei 225 stock index rose on average by 30 percent per annum. In December 1989, it peaked at an all-time high of ¥38,915."
> — Princes of the Yen

## 29 December 1989 — The Nikkei peaks at nearly 39,000

On the last trading day of 1989 the Nikkei 225 stock average closed at 38,915, its all-time high. Japanese assets and companies looked poised to dominate the world. It was the top of the bubble, though few recognized it at the time.

## 1990 — Collapse of the Japanese bubble

From 1990 onward bank loan growth slowed, asset prices fell, speculators went bankrupt, and about 100 trillion yen of loans turned into bad debts, pushing Japan into its worst recession since the Great Depression.

> "This is what happened from 1990 onward. Bank loan growth slowed. As asset prices fell, speculators were bankrupted and banks were left holding the bag."
> — Princes of the Yen

## 1990 — Mieno publicly defies the Finance Ministry

In 1990 Governor Mieno engaged in a rare high-profile disagreement with the Finance Ministry, which opposed monetary tightening, and stuck to his tight money policy throughout his term.

> "Then, in 1990, Mieno surprised the establishment by engaging in a rare high-profile disagreement with the Finance Ministry over monetary policy."
> — Princes of the Yen

## 1990 — Ministry of Finance total volume regulation of bank lending

In 1990 the Ministry of Finance imposed its sōryō kisei, a rare total volume regulation of bank lending, though it was administered by the Bank of Japan and followed the BoJ's earlier tightening of 1988-89.

> "The Ministry of Finance’s sōryō kisei (total volume regulation of bank lending) of 1990 caught the public attention, as it was a rare intervention by the ministry in the quantity of bank lending, but it was also administered by the Bank of Japan; more importantly, it only followed the tight window guidance policy that the Bank of Japan had already adopted much earlier, in 1988 and 1989."
> — Princes of the Yen

## 1990 — Nikkei falls 32 percent in one year

In 1990 the Nikkei 225 index dropped 32 percent and land prices began a sharp decline, with some speculative commercial plots losing 80 percent or more of their market value.

> "In 1990 alone, the stock market, as measured by the Nikkei 225 index, dropped a precipitous 32 percent. Land prices also started their sharp decline."
> — Princes of the Yen

## 1990 — The bubble bursts and markets crash

Stocks fell through 1990 as the Bank of Japan raised interest rates, and land prices peaked and then slid from 1991. By 1992 the Nikkei had lost more than half its value from the peak. Trillions of dollars in paper wealth vanished, and the collateral behind bank loans collapsed.

## January 1990 to December 1994 — Asset prices collapse and the bust begins

From January 1990 to December 1994 Japanese stock and land prices halved, bankruptcies soared to postwar highs, several banks and securities firms became insolvent, and the boom turned into the biggest slump since the 1930s.

> "Between January 1990 and December 1994, stock and land prices halved. Many companies and individuals who had borrowed money to purchase land speculatively found themselves unable to service their debts, let alone repay the principal."
> — Princes of the Yen

## 1991 — Japanese foreign investment tide reverses

In 1991, even as the current account headed for record surpluses over $90 billion, Japan's long-term capital outflows vanished and the country recorded $40 billion of net inflows, its first in more than a decade, becoming a net seller of foreign assets.

> "In 1991, as the Japanese current account was heading for new record surpluses, topping $90 billion, net long-term capital outflows had suddenly vanished. Japan recorded $40 billion worth of net inflows of long-term capital, the first in more than a decade."
> — Princes of the Yen

## July 1991 to September 1995 — Bank of Japan begins 1990s rate-cutting cycle

The Bank of Japan lowered the official discount rate ten times during the 1990s, starting with the first cut in July 1991 from 6 percent, reaching 1.75 percent by September 1993 and 0.5 percent by September 1995.

> "The Bank of Japan lowered the ODR ten times in the decade of the 1990s, beginning with the first reduction in July 1991, before which it stood at 6 percent. Until September 1993 it was lowered seven times, reaching 1.75 percent. The ODR was further lowered to 1.0 percent in April 1995 and to 0.5 percent in September 1995."
> — Princes of the Yen

## July 1991 — BoJ begins cutting the official discount rate

Starting with the first reduction in July 1991, when the rate stood at 6 percent, the Bank of Japan lowered the official discount rate ten times during the 1990s, reaching 1.75 percent by September 1993 and 0.5 percent by September 1995.

> "The Bank of Japan lowered the official discount rate (ODR) ten times in the 1990s, beginning with the first reduction in July 1991, before which it stood at 6 percent."
> — Princes of the Yen