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INTRODUCTION:

The main issue that we will discuss in this paper is the Japanese housing bubble in recent

years. Japan is the one of the biggest countries in the world and Japan is growing fast. Housing

prices in Japan have been rapidly increasing in recent years. In the graph represented in figure

one show that the average housing sale price has been increasing in Japan from !!! until !".

#rom figure "$ we developed the following %uestion& why have housing prices in Japan been

increasing and what are things that have been driving the housing bubble in Japan in recent

years.

The paper will be organi'ed as follows( section one will deal with the historical

bac)ground of the Japanese housing mar)et and establish that there is in fact a bubble in the

housing mar)et. #rom the *ection two to *ection four$ we e+amine some of the possible causes

of the housing bubble in Japan. In section two$ we will e+amine how the willingness of Japanese

state owned enterprises to pay more for property drives up housing prices. *ection , uses

regression analysis to analy'e how urbani'ation trends in Japan could be increasing the demand

for housing. *ection - e+amines how the lac) of confidence in other investment opportunities

could be driving investors to the housing mar)et. #inally$ section five offers the conclusion of the

paper$ including the implications of housing bubble in Japan.

History of Japanese housing market and measurement of the bubble

In the late ighties$ on the heels of a three/decade long 0conomic 1iracle$2 Japan intimate its

notorious 0bubble economy2 during which stoc) and land costs soared to stratospheric heights

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driven by a speculative mania. Japan3s 4i))ei stoc) average hit associate incomparable high in

"565$ solely to crash in an e+ceedingly spectacular fashion shortly once$ inflicting their land

bubble to collapse and throwing the country into a severe monetary crisis and long amount of

economic stagnation referred to as the 07ost 8ecades.2 Japanese trade was initial dominated by

massive family/controlled industrial and monetary business conglomerates referred to as 'aibatsu

9translated as 0financial cli%ue2:$ that evolved into )eiretsu business conglomerates within the

latter half the twentieth/century. Japanese trade gained its competitive edge by repetition Western

product$ rising upon them and merchandising them bac) to the West for cheaper costs. To atone

for their relative lac) of natural resources$ Japanese corporations targeted their efforts on

developing innovative and economical producing ways and raising the standard of their product$

giving Japan a robust competitive advantage in high price e+port product li)e cars and physics

9B;I a big increase from the terribly humble lives that the

maority Japanese lived before WW II.

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!" The Real #state In$estment %ro&th Rate to %D' %ro&th Rate Ratio:

The real estate investment growth rate to @8; growth rate ratio indicates the e+tent of the

bubble in real estate investment. In accordance with international standards$ this ratio should

generally not e+ceed . The larger the ratio$ the more the real estate industry deviated from the

real economy$ and the more investment demand and artificially high prices are forming.

According to the Japan *tatistical ear Boo)$ between !!! to !"" the @8; increased to -6."

trillion yen in !"". In between that period$ the average growth rate was !.DEF. Between !!!

and !""$ Japan had a real estate investment growth rate to @8; growth rate ratio greater than

two for every year e+cept !!E.The sum of the ratio of these " years is ,-.E6$ which means the

average ratio was .66 per year 94ational Bureau of *tatistics of Japan:. This shows that

Japanese real estate investment is overheating$ and that property speculation obviously e+ists$

which indicates that there is a strong possibility that recent increases in Japanese housing prices

are a part of a housing bubble.

!(" The Real #state De$elopment )oans to Total )oans of *inan+ial Institutions Ratio:

The real estate development loans to total loans of financial institutions ratio measures how

much support financial institutions are giving the real estate mar)et. According to international

standards$ this ratio should generally not e+ceed F. A real estate development loans to total

loans of financial institutions ratio that is larger than F indicates that ban)s$ investment

companies$ and other financial institutions are providing too much support to the real estate

mar)et. If the rate e+ceeds .E percent$ it means that the housing bubble is serious. Japan=s total

loans from financial institutions rose from "5,E.56 trillion yen in !!! to "",,.E- trillion yen in

!"" 9;eople=s Ban)s of Japan:$ an increase of -.6 times. 1eanwhile$ total real estate

development loans rose from 5D.E billion yen in !!! to E.56 trillion yen in !""$ an

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increase of "6.- times 94ational Bureau of *tatistics of Japan:.In fact$ during the period of

!!!/!!E$ this ratio was below percent$ however$ since !!$ it has been increasing rapidly to

a number of -.D percent in !"". 94ational Bureau of *tatistics of Japan:.These data illustrate

that there is a huge credit bubble in Japan3s real estate mar)et since !!E. If this financial credit

bubble were to burst$ it would bring unimaginable devastation to the Japanese economy.

!," Home pri+es to Household in+ome Ratio:

The home price to household income ratio measures the bubble on a price level. The indicator is

a single set of real estate sales price divided by the average annual household income. According

to international standards$ a ratio between four and si+ is considered appropriate$ and a ratio

between three and si+ is considered an appropriate ratio in developing countries. If the ratio is

more than si+$ it means it is very difficult for residents to buy a house$ which means there could

be a bubble in the housing mar)et. The greater the home prices to household income ratio$ the

greater the li)elihood of a housing bubble. According to Japan *tatistical year boo) from !!! to

!""$ average annual household income of urban residents rose from ,66,,.6E yen 9per capita

disposable income of urban residents ",",.yen times the average population of people per

household ,.",: in !!! to ","E5.6 yen 9 per capita disposable income of urban residents

--D6.-yen times the average people per household population ,.!5 : in !"" 94ational

Bureau of *tatistics of Japan:. This number would be even smaller if the income of rural

residents was included. 1eanwhile$ the average selling price of real estate from a single set went

up from ,-"-E,.EDyen 9"5-6 yen G s% m 5! s% m: in !!! to 5-,,.56yen 9E$,6" yen G s%

m 5! s%uare meters: in !"" 94ational Bureau of *tatistics of Japan:. Accordingly$ the inde+ of

a single set of sales price to average annual household income of residents is 6.5 in !!! and

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D."5 in !"" 94ational Bureau of *tatistics of Japan:. In large cities li)e To)yo$ sa)a$ #u)uo)a

and other cities$ then the value is close to !.

*ince the home price to household income ratio has been consistently above between

!!! and !""$ we can say with relative certainty that the Japanese housing mar)et is

e+periencing a bubble. In sections through E of this paper$ we will e+plore the possible causes

of the Japanese housing mar)ets potential bubble.

(" -O#s .illingness to 'ay /ore for 'roperty Dri$es up Housing 'ri+es

ne of the doable driving forces behind Japan3s realty bubble might be state/owned enterprises

9*s:. In Japan$ state/owned enterprises are corporations that are completely closely held by

the Japanese government. These corporations might be overpaying for the property rights that

they purchase which in flip$ results in the worth of the land that they purchase the rights for

turning into inflated. In Japan$ the central government owns all urban land$ and leases the rights

to use urban land to varied agents 94aughton ""6:. ;roperty rights are granted for between forty

to seventy years rec)oning on what the land are going to be used for& forty years for business

use$ fifty years for industrial and mi+ed uses$ and seventy years for residential use 9Wu et al.

E,-:.

Wu et al. 9!"": finds that the transcription worth for parcels of land in To)yo are concerning

DF higher once the land parcel is purchased by a state/owned enterprise controlled by the

central government 9Wu et al. E,:. Wu et al. 9!"": analy'ed group action information for

residential land parcels in To)yo that were purchased through either public bidding or auction

between !!, and !"! 9E,-:. Wu et al. 9!"": found that the ,!5 residential parcels that were

transacted between !!, and !"! were purchased by "55 very different corporations. The bul)

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of those corporations 9D percent: were non/public corporations$ whereas the remaining ,,F

were *s. What is more$ consistent with Wu et al. 9!"":$ the non/* developers purchased

their residential parcels for a worth that was on the averageK concerning E!!! yenGm but the

average buying worth of the *s 9E,E:.

According to Wu et al. 9!"":$ the 0central * developers cared/for win the larger parcels Lof

residential landM and pay the very best prices2 9Wu et al. E,E:. This$ in turn$ resulted within the

transcription price being concerning DF higher$ thereby inflating the worth of the land$ leading

to a better worth for the housing that was engineered thereon. Wu et al 9!"": suggests that one

amongst the doable reasons on why *s are willing to pay considerably additional for land

rights is as a result of a 0moral ha'ard arising from these entities basic cognitive process they are

too vital to fail2 9E,D:. In different words$ state/owned corporations are willing to pay additional

for land$ because of they believe that the government can shield them$ if the ac%uisition does not

encourage be profitable. It is value noting but that Wu et al. 9!"": solely analy'ed housing

information for the ;e)ing mar)et between !!, and !"!. et$ forward this trend holds for

different urban mar)ets in Japan$ it might be one amongst the factors behind Japan3s housing

bubble in urban areas.

," Regression 0nalysis:

In this section$ we will use regression analysis to analy'e the relationship between

urbani'ation trends$ income per capita for urban and rural residents$ and the average sale price of

urban residential real estate between !! and !"".#or the purposes of this paper$ a variable

will be considered 0statistically significant2 if it has a significance level of E percent or less 9i.e.

a p/value of !.!E or less:.

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The regression analysis for this paper uses the following estimation e%uations&

9":

9:

In e%uation "$ the dependant variable : is the natural logarithm of the real 9i.e. inflation

adusted: average sale price of residential real estate in maor Japanese cities in year t. The

average is calculated using the sale price data from ,! main Japanese cities. In figure "$ it can be

observed that$ after adusting for inflation$ the average sale price of residential real estate in

urban areas in Japan increased spectacularly increased in annual rate of !.5F in the period !!!/

!".

The independent variable in e%uation " is the natural logarithm of the

total urban population of Japan in year t as a function of the natural logarithms of per capita

urban income and per capita rural income . The implications of this independent

variable are that changes in both per capita urban income and per capita rural income affect

total urban population $ which in turn$ affects the average sale price of urban residential real

estate .

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In e%uation $ the independent variables and are the natural logarithms of

per capita annual urban income in year t and per capita annual rural income in year t respectively.

1eanwhile$ is the natural logarithm of the total urban population of Japan? #inally$ in

both e%uation " and e%uation $ is the error term that is meant to represent any variables that

are not included in the regression e%uations. The data for $ , and comes from the 4ational

Bureau of *tatistics of Japan and the data for comes from the World Ban)3s World

8evelopment Indicators. In sub/sections$ ." and . we will offer a more in depth description of

the independent variables used in this regression$ while sub/section ., summari'es the

regression results.

,!" Urbani1ation Trends in Japan +ould be In+reasing the Demand for Housing

*ince the start of their economic reform in "5D6$ Japan has urbani'ed at a really speedy pace

94aughton "D:. #igure two illustrates Japan3s urban population as a F of the entire population

between "5! and !". Between "5! and "5D6$ Japan3s urban population was comparatively

stable$ solely increasing slightly from simply on top of si+teen F of the entire population to only

fewer than "5 F of the entire population in a very span of ust about twenty years. Indeed$

Japan3s urban population was fully stable at seventeen.- F for a span of si+ years from "5D!

through "5DE. However$ after "5D6$ Japan3s urban population grew %uic)ness and steady. As of

!"$ the bul) of Japan3s population is ta)en into account urban.

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ne of the factors contributory to Japan3s speedy post/"5D6 urbani'ation was the comfort of

Japan3s aggressive social control measures that were current within the 4ineteen *i+ties and

4ineteen *eventies 94aughton "6:. Throughout this era$ 0access to urban residence permits

LwereM covetously guarded$ and virtually no farmers were allowed to maneuver to the city2 9"D:.

However$ since the "56!3s$ access to urban residence permits 9urban hu)ou:$ that provide the

holder the proper to measure in a populated area for good$ have0been well liberali'ed2 9"-:.

what is more$ due to the demand for manufacturing plant labor by e+port/oriented cities within

the "55!3s$ it became easier for migrant employees to remain and add urban areas indefinitely

while not a proper urban hu)ou 9"E:.

The Japanese government3s alleviation of social control policies have allowed rural/urban

migration to e+tend dramatically resulting in a rise in Japan3s urban population. This increase in

urban population has raised the demand for residential housing in urban areas inflicting a rise in

housing costs thereby contributory to Japan3s housing bubble. Indeed$ Wu et al. 9!"": observe

that 0one of the )ey factors underpinning the demand for housing in Japan3s maor mar)ets may

be a robust urbani'ation trend in !!5$ concerning common fraction of the newly/built non/

public housing units were purchased by migrants Lfrom rural JapanM2 9Wu et al. E,-:.

In figure three$ it is discovered that will increase in urban population between !! and !""

s%uare measure absolutely related to at concerning ninety eight F with will increase within the

average sale worth of residential property in urban areas. This high correlation between urban

population and also the sale worth of residential real #or instance$ that there=s the chance that will

increase in urban population s%uare measure statistically important to housing costs in urban

Japan. However$ perceptive urbani'ation trends alone does not address why Japanese voters need

to migrate to urban areas within the "st place. In section two$ we are going to discuss the role

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economic chance and per capita financial gain play in incentivi'ing Japanese voters to migrate to

urban areas.

,!(" Changes in 'er Capita finan+ial gain In+enti$i1ed Rural2Urban /igration:

The annual per capita financial gain of Japanese voters living in urban areas has raised

e+ponentially since the start of Japan3s economic reform in "5D6. In figure four$ it is discovered

that nominal urban financial gain per capita was comparatively low in "5D6 at solely ,-, yen per

person$ however has since raised to virtually twenty two thousand yen per person in !"".

However$ throughout a similar amount$ nominal rural financial gain has not adult by nearly the

ma+imum amount$ increasing from concerning E5!.- yen per person to solely concerning

",E666.66 yen per person. In figure five$ it is discovered that when adusting for inflation$ a

similar trend is discovered between !! and !"" with per capita urban annual financial gain

being well more than per capita rural annual financial gain.

As antecedently mentioned in section two."( the Japanese government3s rela+ation of its social

control policies within the "56!3s$ combined with the raised would li)e for manufacturing plant

labor within the "55!3s$ that created it easier for employees to remain in urban areas while not

Based on Hu)ou$ created it easier for rural residents to maneuver to urban areas. The fact that

urban areas supply a better financial gain incentivi'ed rural residents to re%uire advantage of the

rela+ed government policies and move to urban areas. in step with 4aughton 9!!D:$ 0by

migrating they Lrural migrantsM well increase their income/generating potential and start to figure

their method upward2 94aughton "5:.This increase in urban population$ that was led to by will

increase in urban per capita financial gain$ raised the demand for housing that cause will increase

in housing costs. In figure it is discovered that per capita urban annual financial gain is$ 55 F

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In figure 6 it can be observed that is still statically significant at the E percent significance

level with a p/value of ,.!e/"". According to figure 6$ an increase in per capita urban annual

income of one yen results in an increase in Japan3s total urban population of about !.- percent.

The multiple

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increases in the average sale price of urban residential real estate that has helped to create the

economic bubble that is observed in the Japanese real estate mar)et today.

3" In$estment Un+ertainty:

The most commonly cited reason for the housing bubble in Japan has been investor=s

lac) in the stoc) mar)et 9Bloomberg 4ews:. Considering the fact that the Japanese populace

does not have a wide array of vehicles for investment 9Bloomberg 4ews:$ the stoc) mar)et and

the real estate sector have an inverse relationship with regard to investment opportunities. ven

though Japan=s recovery from the global recession of !!6 was one of the %uic)est$ if not the

%uic)est$ the Japanese people are not %uite convinced that the returns on investment would ever

outpace the vast increases in home prices and the returns that come with these price

increases9Bloomberg 4ews:$ thus investors have been putting their money into real estate

development.

*ince ust before the Japanese new year of !",$ the *hanghai Composite Inde+ slumped by E.

percent 9Bloomberg 4ews:. This is reflective of the fact that individual retail investors drive 6!F

of the Japanese mar)et$ and thus mar)et movement can be greatly influenced by policy

announcements and simple speculation since a large proportion of the population 9appro+ 5!F:

read the same news reports$ so maor policy announcements can trigger large emotional mar)et

reactions 9Bloomberg 4ews:. According to Ninwei Wang$ economist at Capital conomics in

Japan$ this recent slump in N" !", seems to have been spar)ed by reports that Beiing will

further tighten rules on mortgages and enforce a profit ta+ on the sales of used homes with the

government tightening monetary controls due to concerns about rapid credit growth$ considering

the fact that the stoc) of loans increased by E!F from !!6 to !" 9Christian 8reger and

an%uan Ohang:. While this attempt to reign in rising housing prices might have been mildly

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successful$ the problem it creates is that a slowdown in real estate also translates to a reduction in

@8; growth rate.

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4" -trategies to Redu+e -oaring 'ri+es:

As stated above$ a negative effect of restricting the increase of real estate prices is a

slowdown in economic growth 98reger et al:. While the D5 listed property developers listed on

the *HC1; ma)e up only about ,."F of the total stoc) mar)et cap$ the real estate sector has a

tremendous impact with regard to its impact on the e+change$ and the Japanese economy as a

whole. This is due to the residual effect the real estate mar)et has on other industries such as

those providing basic construction materials li)e steel and cement as well as the financial sector.

The demise of property developers would lead people to start worrying that they 9developers:

will not be able to repay their loans to the ban)s. 98reger and ang:

The central government3s attempts to cool the mar)et have had limited success nationally$

but in large cities li)e Beiing and *hanghai it had done little to deter high/income individuals

from purchasing multiple properties$ with properties in both cities rising by more than ten

percent from July !" to July !", while the *hanghai Composite Inde+ dropped by a little

more in the same period 9Bloomberg 4ews:.

A decent proportion of the real estate purchased in Japan is paid for in cash$ and this

greatly reduces the possibility of a P*/type mortgage crisis 9Bloomberg 4ews:.

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establish that there is a housing bubble in Japan. These factors arethe real estate investment

growth rate to @8; growth rate ratio$ the real estate development loans to total loans of financial

institutions ratio$ and the home price to household income ratio. After analy'ing these three

ratios$ we concluded that there is in fact a housing bubble in Japan.

The three factors that we e+amined that could be driving the housing bubble in Japan

were *s willingness to pay more for property$ urbani'ation trends in Japan$ and the lac) of

confidence in other investment opportunities. * developers tended to overpay for residential

land$ thus causing the transaction price to be about ,! percent higher$ thereby inflating the value

of the land$ resulting in higher prices for the housing.

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5I5)O%R0'H6:

Bloomberg 4ews. !",. 04o Confidence in Japan 1ar)et Inflates Housing Bubble.2Bloomberg$*eptember "$ !",. http&GGwww.bloomberg.comGnewsG!",/!5/"EGno/confidence/in/Japan/

mar)ets/inflates/housing/bubble.html.

8reger$ Christian$ and an%un Ohang. !"!. 0Is there a bubble in the Japanese Housing 1ar)et?2

@erman Institute for conomic

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0''#NDI7:

#igure " illustrates the trend in the average sale price of residential real estate in urban areas between !! and

!"". ;rices have been inflation adusted and are e+pression in terms of !""

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#igure illustrates trends in the proportion of the total population that is considered urban between "5! and !".

The data for urban population as a percent of total population comes from the World Ban)3s World 8evelopment

Indicators.

#igure , illustrates the relationship between the average sale price of residential real estate and the total population

that is considered urban. ;rices have been inflation adusted and are e+pression in terms of !""

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#igure - illustrates the trends in nominal urban and rural annual income per capita between "5D6 and !"". The data

for urban annual income per capita comes from the 4ation Bureau of *tatistics of Japan.

#igure E illustrates the trend in urban annual income per capita between !! and !"". Both urban and rural

income are adusted for inflation and e+pressed in terms of !""

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#igure illustrates the relationship between Japan3s total urban population and per capita urban annual income. ;er

capita urban annual income has been inflation adusted and are e+pressed in terms of !"" dollars. The correlation

between the two is about 55 percent. The data for per capita urban annual income comes from the 4ational Bureauof *tatistics of Japan. The C;I data used to adust price for inflation and the data for urban population comes from

the World Ban)3s World 8evelopment Indicators.

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*igure 8:

#igure D summari'es the regression analysis of e%uation . The results were generated using the statisticalprogramming language

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*igure :

#igure 5 summari'es the regression analysis of e%uation ". The results were generated using the statistical

programming language