Untitled Essay Research Paper The Economy of

Untitled Essay, Research Paper

The Economy of Japan had experience a tremendous growth since the end of

the Korean war. The growth of GNP in 1967 and 1968 was above 10 % (double

digit growth period) which exceed countries such as Britain, France and Germany.

The economy experienced a boost is due to many reasons, such as: enlargement

of industrial facilities, massive adaptation of western technology and education,

lower the military expense to 1% of GNP, relation with power nation, human

resources and their spirit to achieve “zero defect program”. But after the

first and second oil crisis that occur from 1973 onward. The economy move

downwards partially due to the poor management of economic policy. Although

the government had attempt to adjust the economic policy but the recovery

was slow. As the soaring of yen continues the demand for export has increase

tremendously. With the concern of the United State of this problem, president

Reagan and the G5 have signed an agreement with Japan called “Plaza Agreement”

, the agreement stated that the exchange rate of Japan and Deutschmark can

appreciate against the U.S. . Since then the yen value began to appreciate,

Japan was going through a period of trade balance adjustment. While Japan

is prepare to go through a period of trade balance adjustment, it will also

suffer a period of recession, so the government strongly encourage business

activities to strengthen the economy in order to prevent backwash effect.

It was this event which boost up the GNP and raise the exchange rate. With

this exchange rate advantage it stimulate business activity on housing and

stock investment which created a bubble economy. During this period almost

the entire country was involve in land speculation or other speculate activities.

In this essay it will prove that land speculative activities had create many

negative impacts to the Japanese society and economy. Firstly, it will describe

the cause of land speculation. Secondly it will discuss on the society and

political effects in Japan and lastly it will focus on the economy effects,

more over it will include the aftermath when the bubble collapse.The root of this bubble economy is due the wave of land speculation. The

wide spread of land speculation activities were mainly because it is profitable.

The speculative transactions in assets grew and grew and many believe that

this will last for very long period of time. One of the reason that leads

to massive investmentin the risky activities is because of the success of the Japanese in the

international market during 70*s – 80*s. Many Japanese enterprises and business

man had become very wealthy. These people have a large sum of equity to invest.

Some of these people have focus on risky asset such as stocks and land, therefore

many of the regular ventures were left behind. One of the major cause of

the massive transaction in the land market was due the incremental of loans

by banks. Financial institution was very positive in lending money to the

enterprise. This enhance the accessibility to the land speculate market.

Each size of this loan is very large. This is because the size of mortgage

in Japan financial institutions are based on the collateral, (house) while

in North America the size of the mortgage is based on the borrower*s income

stream. Therefore the size of loan can be obtain by borrower is larger in

Japan than North America. Also 62% of Japanese households own the home that

they live and in average the value is near 4 million yen. Therefore there

are lots of potential investors. And during the period of speculative activities,

borrowers increase the value of their loans as the value of their collateral

increases. Since asset is highly liquidate, the number of potential speculators

are high and borrowers in Japan were able to get a larger size loan on real

estate therefore speculative activities sink into the level of common home

owner and large enterprise. Beside the method of calculating mortgage size,

another reason why the size of loan was so large is probably that both the

bank and the investor were behind the land speculation activity (banking

scandal). Investors were paying some key money (sort of a bribe) to financial

institution in order to obtain a larger size loan. Therefore many financial

institutions were over loan during this period. Another form of raising cash

flow for the speculate market was by braking down a loan that obtain from

a large financial institution to a specific enterprise, then lend a small

piece of this loan to those who was not eligible to obtain a loan from the

bank. These companies that act as the funnel will earn a certain amount of

interest from these smaller companies (branch effect). Therefore all classes

of companies and society can easily access in the speculate market. Other

large corporate, construction company, organize crime group and even temple

(religious) were also involve in land speculation. Another encouragement

to the speculative market was because the government (liberal democratic

party) had originally lower the capital gain tax in the early 80*s. Therefore

the profit for owner to resale their land was large.

Flaws in government policy also indirectly allow investor to get away of

property tax expense. For example some land owner could just plant little

crops over a large piece of expensive vacant land in urban city and declare

them as agriculture land. As a result they will be tax very little. Therefore

the incremental of land speculative activities were due to over size loan,

high accessibility to the land speculative market and indirectly by the

government flaws.During the peak of the land speculation there is a quite interesting study

of land price in Japan. (1) “If you sell the entire property of Tokyo you

can actually buy the entire United state and by just selling the surrounding

land of the Imperial palace you can buy Canada.” Although it might of been

a little over exaggerate, but the point is that the land value in Japan compare

to North America is much higher. Since there is no one side of a coin, Land

speculation had create many social problems in Japan. Firstly, land speculation

had rise the rent and housing cost tremendously. As a result many young couples

and low income families were unable to form their own house hold. In average

the cost of a house in Tokyo had raise to about 500 million yen. The younger

group with low income cannot afford it and the mid age workers may also not

able to afford it. Primary is because they would have to give up at least

three-fifth of their income in loan repayment. Also if they have a relatively

low amount of down payment, there working age may not be long to repay a

mortgage. The longer the amortization period, the larger the amount of interest

they bare. The white collar had become the slavery or sacrifice of the never

ending mortgage payment and high cost of housing. In 1990 the births live

in Japan was 1.2 million, in fact the number is the lowest since 1893. Many

analysts believe that one of the reason that lead to this slow growth of

population could be create by high house prices. So Japanese people have

stopped having children and large family is rare. Therefore this is one of

the causes of Japan is running our of Japanese. This is also a very big social

issue of the modern Japanese society but the precedent of the slow growth

of population has now move from high housing cost to other social problems.

During this period, there were lots of cases regarding on the robbery and

suicidal in the police force.(1) – Wood, “The Bubble Economy”, Sidgwick & Jackson, London 1992 pg.


This was mainly because of the heavily debts that these police bare and they

have no other choice than to attempt to go above the law. Due to the financing

problems in the real estate market, it leads to the founding of what is program

call “2 generations mortgage plan”. The founding of this plan was propose

to suit the majority of the white collar in the Japanese society. This plan

was develop since 1983 but it became more useful from 1985 onwards and the

qualification of this program must be father-son that plan or already living

together. (son must be older than 20 and must repay the loan by the age at

70) The size of the mortgage is determined by the borrower, interest is flexible

and the applicants must purchase an life insurance in order to protect the

risk of un collectible due to death. (Pay by the bank) Husband and wife can

also join this program . Banker said that the applicant may able to repay

this loan in 40 yr. and this type of program also encourage a bonding

relationship between father and son. On one side this program may allow a

regular income worker to be a home owner but on the other side this person

will bare a debt for the entire life and passes on to the next generation.

Moreover it may limit on the consumption of the borrower on other composite

good. The booms in land prices also discourage people’s incentive to work.

(2) “Because if any lucky individuals inherited or own a piece of land in

metro Tokyo, they will suddenly gain a net worth of 250 to 300 million yen.”

This amount of money is equivalent to honest man*s life time income plus

retire pension. Since may people get rich during this period, the number

of middle class income in Japan had tremendously increase. Under these

circumstances, many believe they have already achieved the good life therefore

people lose the incentive to work hard and get ahead. Therefore it will distort

the social structure in Japan and create many problems to the government

(taxations). Since the sacrifice and cost of home ownership is so high therefore

many Japanese had prefer to rent. Since the demand of rental market increase,

it also attracted many investor and speculator. Therefore tenants also suffer

from the incremental raise of land price. In Japan, young couples, low income

group and the elderly participated as the major group of tenant in Japan.

During this period, owners were looking to sell their property for high return

and in order to force the tenant to move (after tenant moves landlord can

chose higher quality tenant or resale the property for a larger profit) rent

rises extremely high. Many elderly were unable to afford such high rent so

(2) – Wood, “The Bubble Economy”, Sidgwick & Jackson, London 1992 pg.

61many were force to move. As a result many had become homeless. In some cases

tenant refuses to move so some owner will hire organize gang group to force

them out. Some of these unfortunate tenants will give up the hope in home

ownership in the core and move further and further away from the center.

Therefore many of them will spend over 2 to 3 hours to commute from their

place to work. So either way, home owner ship and tenants suffer from the

raise of housing price. The natural populations are not the only civilian

of this incident. Many foreign students also suffer from the housing problem.

(3) “In 1986, there was a statistic taken over a total number of 8116 foreign

students. Apparently only 17% lives in an adequate resident facility.” The

primary reason was due to the cost of rent, high exchange rate and lastly

it was because the local people do not wish to rent their property to foreign

student. Student associate had propose to built new resident housing but

due to the heat of land speculation (create an increase in the demand of

land) and high construction cost, the new residential housing will be very

costly. Therefore this new construction will probably raise the rent 2 to

3 times. While the housing problem continues for foreign students from 80

onward the Japanese government had still declare that they (4) “expect a

total of 100,000 new foreign student will be coming in during the 21st century.”

This reflects that the government has pay very little awareness not only

on the natural population but also foreign student. Beside foreign students

and the natural population,

another group that affects by the high land prices was foreign ambassador.

As the price continued to rise (specially in Tokyo), the ambassadors of the

lower wealth countries (such as Africa or Uganda ) were force to move their

location away from Tokyo due to high rent. Although this problem was reflect

to the Japanese government but it was remain un solve. Other side effects

of the land speculation was the new residential construction during that

era. In (thousand leaf city) many of the new construction area no longer

have a large plain or play ground that similar to a traditional residential

area.(3) – Cao Man Kit, “The Life of Foreign Student in Japan”, Ming Chang, H.K.

1991, pg.160

(4) – Cao Man Kit, “The Life of Foreign Student in Japan”, Ming Chang, H.K.

1991, pg. 167In one of the Japanese newspaper there is an advertise article that describes

their forecast on the living condition of the Japanese in the 21st century.

(5) “The husband should not return home until weekend, during weekdays just

live in worker*s resident near their workplace. This resident housing should

be similar to hotel where it has an into desk that can wash your cloths,

postal service and take your message. Their home should be in some rural

or less urban area that 100 km away from work.” This reflected that the rise

of land value did not just only effect the affordability of the housing but

also distort the lifestyle of the Japan workers as it had reflect in the

earlier incident of the 2 generations mortgage. (6) “During the bubble economy

period the zoning regulation in Tokyo has revise to allow builder to built

more capital on the piece of land. So this indirectly rises the potential

of building space in Tokyo. It will again raised the real estate value, property

taxes and traffic congestion level of the area.” According to the (7) “National

Land Agency statistic, about half of firms surveyed in the mid to late 1980s

responded that they had no development plans for the land that they acquired.”

They rarely built homes or apartments, but instead constructed office buildings

that would bring in steady revenues. From the developer*s point of view,

houses and apartment are the least profitable projects. So land would almost

never allotted for housing”. With land speculation and the shortage supply

of new construction on housing the Japanese residents are very difficult

to find an affordable place to live beside the houses that are very far from

work place. In the current Japan election the percentage of participant voters

in Japan has drop below 60% of the total population and the liberal democractic

did not receive 50 % of the seat through election. This percentage was the

lowest since WWII and mainly was because the populations in Japan no longer

believe the liberal democratic party can bring them back from recession.

Also they did not have a good control system during the bubble economy, failure

of the recovery program after the bubble splash.(program such as expansion

in public investment, lowering the interest rate and series of economic counter

measure but the yen is still pretty high which discourage export) In more

specific, during the bubble economy the government did not really propose

(5) Cao Man Kit, “The Strategic of Japan Enterprise”, Ming Chang, H.K. 1992,

pg. 68

(6) Mc Millian Charles, “The Japan Industrial System”, Berlin, New York,

1996 , pg. 56

(7) Wood, “The Bubble Economy”, Sidgwick & Jackson, London 1992 pg. 89an effective tax law until 1990. (National Land Value Tax- prohibitive tax

on profits from the sale or transfer of land national land law 1974) This

revitalizes the local property tax and assessment ratio for the fixed asset

tax. Another official policy was issue during 1990 was through the financial

market in which the government regulates on the loan activity. This eventually

slow down the loan activities largely in 1991. But still the government really

lagged their response for those who already suffer for 5 years of high housing

cost. More over during the period of bubble economy, many politics were either

involve in land speculation or was bribe by organize gang group and large

enterprise in order for these people to be more conveniently to have more

benefits in the land market. One incident is involve by a business man Kyowa

and a cabinet minister Fumio Abe, where Abe sold the details of where a new

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