Transcript Bubble economy?

Insight into Japanese Bubble Economy
by
Zhang Wei(Vivi)
Xie Huawei(Amy)
Hu Yingjian(Mike)
Content:
1. Define economy bubble
• Use the graph analyze what is bubble
• World’s first speculative bubble
2. Japanese economy from 1970s to 1990s
• How did bubble form
• Analysis the speculative activity in Japan
• Analyze why Japanese pay much passion into housing not factory.
3. How to measure the bubble in Japan
4. View the essence of Japanese from the recovery of the bubble
economy
• Focus on Neo-Confucianism
5. Analysis the mistake policy in Japanese bubble economy
• Compare the China’s policy in the situation
6. From Chinese real estate to analysis the situation before bubble burst
of Japan and the status quo of China
• Compare the two countries situation
7. Our group discuss the revelation from the Japanese bubble economy
WHAT IS BUBBLE?
 A bubble may be defined loosely as a sharp rise in the
price of an asset or a range of assets in a continuous process,
with the initial rise generating expectations of further rises
and attracting new buyers generally speculators interested in
profits from trading in the asset rather than its use or
earnings capacity.
a trade in products or
assets with inflated
values
*
Original speculative bubble
in the world
Tulip
mania
a period in the Dutch Golden Age
during which contract prices for
bulbs of the recently introduced tulip
reached extraordinarily high levels
and then suddenly collapsed
AN INTRODUCTION OF JAPANESE
ECONOMY FROM 1970S TO 1990S.
Throughout the 1970s, Japan had the world's
second largest gross national product
• From the end of 1980s to beginning of 1990s,
Japanese economy increased dramatically ,
which implied the bubble economy of Japan
• In early 1990s, the bubble was collapsed
•
Mitsubishi invested
$ 846 million to buy
Rockefeller Center
in New York
Sony Corp. used $
3.4 billion to buy the
soul of America
Hollywood Columbia
Pictures
Japan invested $
6.5 billion in Hawaii
How the bubble formed?
1.
2.
3.
4.
5.
6.
U.S. dollar exchange rate was too high
large trade deficits in U.S.
Plaza Account
Japanese currency appreciation
Japanese low interest rate policy
Hot money
Symbol of bubble
Wealth
speculative activity
Speculation
“Speculators create the bubble which lies above
everything. They increase prices with their expectations,
with their bets on the future, and their activities distort
prices, especially in the commodities sector. And that is
just like secretly hoarding food during a hunger crisis in
order to make profits from increasing prices.”
—— George Soros
‘Speculation’ and ‘speculator’ are used rather in a
negative sense and speculation is not recognized as one
of the most decisive incitements behind economic
behavior.
The difference between Speculation and investment
is the fundamentals. And speculation at least contributed
to bubble.
The Issue of Japanese Speculation
 In 17th century, speculators bought the harvests of
Japanese rice famers.
 oil prices go up, the price of rubber also goes up and as a
result the demand for natural rubber goes up.
 In 2011, Japanese earthquake strength yen appreciation.
Yen to US Dollar Exchange Rate
The influence of yen appreciation
 Japanese manufactures move more operations
overseas.
 Toyota, Honda and other Japanese companies try to
move as much production overseas possible to cut
costs.
 IMF lowered its growth estimate of Japan from
1.8% to 1.5%.
 1996~2006, about 220,000 manufacturing sites
vanished, causing a loss of about 3 million jobs in
Japan.
Prevent the formation of speculative
bubbles
 Introduction of a trade register at the stock
exchanges.
 Authorized traders would be strictly
regulated to restrict commercial trade to
its insurance function (hedging).
*Why
Japanese would like
invested their money in the
housing not factory?
The
commercialization
of the house
Plaza Accord
social base
Why Japanese
people
passion to
real estate
not factories?
MEASURE BUBBLE IN JAPAN
Source:Datastream.
That is Bubble!!!
The mistakes
of Japanese macroeconomic policy
The first mistake
• In 1986,because of the appreciation of Yen, Japanese
economy had a short-term recession.
• The Central bank of Japan decreased the discount rate from
5% to 2.5%. This rate was not only the discount rate in
Japanese history, but also was the lowest rate of other
countries.
• This expansionary monetary policy caused a large number of
surplus capitals.
• There are fewer favorable investment opportunities in the
market, so these surplus capitals being channeled into stock
market and real estate market. It caused asset prices increase
sharply.
The second mistake
• In the autumn of 1987, the world economy
grew rapidly . In order to deal with the
inflation, the United States, West Germany,
and some other countries had to raise interest
rates.
• on October 19, 1987, the "Black Monday"
broke out in New York. By the intervention of
Western countries, "Black Monday" presented
only as a market panic.
The second mistake
• The U.S. government was worried that if the Bank of
Japan raised the interest rates, money can not
promptly return to the U.S. and European markets.
It may lead the international market to be turbulent
once again, so they recommended Japanese
government should rise interest rates later .
• The Japanese government was also worried that
raising interest rates may cause more international
capital inflow to Japan to promote the appreciation
of the yen, and causing the recession.
The second mistake
•
•
The Bank of Japan had decided to
continue to implement expansionary
monetary policy to maintain the
discount rate unchanged in 2.5% .
Until May 1989, Bank of Japan
started to raise interest rates , but at
this time, the "Black Monday" had
lasted19 months, and the low
interest rate policy had lasted 27
months.
Extremely expansionary monetary
policy caused the Japanese economy
full of cheap capital.These capitals
were been channeled into the stock
market and real estate market in the
end.
The third mistake
• A sudden reversal of monetary policy pricked
the stock market bubble firstly.
The third mistake
• From may 1989 to August 1990, Bank of
Japan raised the central bank discount rate
from 2.5% to 6%.
• the Japanese Ministry of Finance required all
financial institutions to control the real estate
loans, the Bank of Japan requires that all
commercial banks to slash loan.
• In 1991, Japan's commercial banks had
actually stopped to provide loans on real
estate industry.
The third mistake
• In 1990, the Japanese stock prices fell sharply, it declined
more than 40%, This decline of the stock market caused
almost all banks, corporations and securities firms to huge
losses.
• Followed by the stock market, the real estate market bubble
was also burst with the land prices dropped more than 46%.
Revival Japanese economy
Neo Confucianism
 Self-Control or Asceticism
 Back to Human Natures and
Principles
Government:
 Keep up with the increasing global
economy
 The range of the interest rise and
economic growth rate remain
consistent :2%
 Tax reduction
 Improve confidence of people: such as
apply for 2016 Olympics Games
Society/Business：
 Harmony & Order
 Adjusting the way of investment
 increase the amount of small and medium- sized
business
 In 1996, there are 5,090,000
SME,
at 99.4% of all the enterprises.
 In 2006, there are 4,198,000
SME,
at 99,7% of all the enterprises.
Small and Medium Enterprises
Why in real estate
industry people would
like to buy it when the
price increased?
Real estate
buy not buy
Analysis from the demand function:
D= f ( P, T, I, Pe, pr…… )
Original: price increase, demand decrease
But: expected price >> price
Price – to – income Ratios in
Major Eight cities in China,
June 2010
Beijing
36.6
Chengdu
19.8
Hangzhou
21.0
Shanghai
21.6
Shenzhen
23.3
Tianjin
12.1
Xian
16.5
http://historysquared.com
Japan VS China
Asset prices
Currency
Appreciation
Asset market

 In 1989 Tokyo’s stockmarket had a price-earnings
ratio of almost 70; today’s figure for Shanghai A
shares is 28, well below its long-run average of 37.
Asset market
China’s property
market is certainly
hot. Prices of new
apartments in Beijing
and Shanghai leapt
by 50-60% during
2009.
Average home prices
nationally, however,
cannot yet be called a
bubble.
Asset market

 The most cited evidence of a bubble—and hence of
impending collapse—is the ratio of average home
prices to average annual household incomes. This is
almost ten in China; in most developed economies it
is only four or five.
 Chinese homebuyers do not have average incomes
but come largely from the richest 20-30% of the
urban population. Using this group’s average
income, the ratio falls to rich-world levels. In Japan
the price-income ratio hit 18 in 1990, obliging some
buyers to take out 100-year mortgages.
Currency apreciation

 It is Japan’s experience after the 1980s that most
influences the thinking of policymakers in Beijing.
 One reason why policymakers in Beijing have
resisted a big rise in the yuan is that they fear it
could send their economy, like Japan’s, into a
deflationary slump.
Exchange rate.
  Chinese RMB
 Janpanese Yen
Before bubble burst of Japan VS the status quo of China
Japan before bubble burst
Economy Trade surplus
Policy
China status quo
Trade surplus
Yen Appreciation
RMB Appreciation
GDP (4% - 9%)
GDP (7%- 10%）
Stock and property markets increased
dramatically
Stock and property markets
increased dramatically
Saving high
Saving high
• Loose monetary policy
• Expand domestic demand
• Moderate tightening monetary
policy
• Moderately expansionary
monetary policy
• Expand domestic demand
• Tightening monetary policy
Completely open financial markets
Not completely open financial
markets
Attitude Too optimism
of people
Optimism and Rationality
Are there some
methods could
avoid bubble
collapse in
Japan?
STORY TIME
USA Salomon Brothers，Morgan Stanley-------Stock
index put option ----BET------high reputation
（Goldman Sachs made the option, Goldman Sachs
sold to Denmark, the Danish Government endorse）
January 2, 1990,the option listed on the USA stock
exchange, which made the global capital suppress the
Japan’s economy.
The revelation
from Japanese bubble economy
Neo – Classical Model Y= f (K,L,T)
Endogenous Growth Model Y = A Ka Hb L1-a-b
Value the real economy
Use-Value is material content of wealth
regardless of its social form.（不论财富的社会形
式如何，使用价值总是构成财富的物质内容）
-----Marx's 《Das Capital》
Attach importance to education and
technology
Human resource
Primary Productive Force
Emphasis on the inherent culture
Confidence is more important than gold.
----- Premier Wen
Reference：
• "What is an asset price bubble? An Operational
Definition " Jeremy J. Siegel PDF
http://www.blackwellpublishing.com/pdf/
EUFM_Siegel.pdf
• http://www.marketoracle.co.uk/Article21735.html
• http://www.bsccnu.net.cn/jpkc/xfjj/down
• http://news.cq.soufun.com/2010-08-26/3715481.ht
• http://historysquared.com/2010/08/11/china-housingbubble-the-emperor-wears-no-clothes/price-toincome-ratios-in-eight-major-chinese-cities/
Thank you!