Main reference: https://en.wikipedia.org/wiki/Japanese_asset_price_bubble

  • Early 1980s:
    US Recession due to the fall in the competition of the domestic producers.
    US blame imbalance exchange rate (JPY much weaker than USD, while having high quality product to export).
    US wanted to achieve depreciation in USD & appreciation in JPY
  • 1983: Financial liberalization
    A committee was established. US recommended JP to deregulate and ease restrictions on financial and capital transactions.
    Situation at that time: There were financial restrictions in Japan prevented the Japanese yen to be purchased and invested freely outside Japan.
    This financial restrictions are removed, increasing the demand for the Japanese yen.
    Japanese financial market was opened up to international trade, and the demand for Japanese yen increased accordingly.
    Financial liberalization partly became the cause of asset price bubble as financial liberalization increased the investment in real estate by companies even before the new monetary policy took hold in 1986
  • 1985: signing of settlement of Plaza Accord
    Afterwards, central banks in participating countries (JP, UK, FR, DE, US) started selling U.S. dollars. In JP, demands for the yen increased, and the yen appreciated significantly.
    The exchange rate of yen per dollar:
    1985: 238 yen/dollar
    1986: 165 yen/dollar (yen appreciated?)
    https://data.worldbank.org/indicator/PA.NUS.FCRF?locations=JP
    Plaza Accord directly led to appreciation in the yen.
    Plaza Accord incentivized lowering the discount rate in 1986 and 1987, which is considered to be one of the direct causes of the asset price bubble:
  • 1985:
    increasing number of loans from banks to companies for real estate investment purposes
  • 1986: Monetary policy
    A significant drop in short-term interest rates
    The Bank of Japan (BOJ) had slashed the official discount rate from 5.00% (January 30, 1986) to 2.50% (February 23, 1987).
    The BOJ has also been criticized for its role in fueling the asset bubble.
    The movement of the BOJ to appreciate the Japanese yen rather than stabilizing the asset price inflation and overheating meant little could be done during the peak of the crisis.
  • 1986-1991 : The Japanese Asset Price Bubble
    land prices continued to rise until the early 1990s
  • 1992 : The burst of Japanese Asset Price Bubble