ERI Discussion Paper Series No.58
Asset Market and Business Fluctuations in Japan

December 1993
Kazuo Ogawa
(Kobe University, Economic Planning Agency)
Shin-ichi Kitasaka
(Nagoya City University, Economic Planning Agency)
Toshio Watanabe
(Toho Life Insurance)
Tatsuya Maruyama
(Economic Research Institute, Economic Planning Agency)
Hiroshi Yamaoka
(Economic Research Institute, Economic Planning Agency)
Yasuharu Iwata
(Economic Research Institute, Economic Planning Agency)


The Japanese economy has plunged into deep recession around the fourth quarter of 1990 to the first quarter of 1991 after a long period of booms, which is recorded as the second longest booms in the postwar period in Japan. The real GNP growth rates hovered around 5 % during the fiscal years of 1987-1991, while it was only 1.5% in 1992. Among the demand components, slowdown of growth is observed most notably for the private residential investment and business investment. The growth rate of the former was-8.6% and -5.4% in 1991 and 1992, while that of the latter was-4.1% in 1992.

However, the most notable characteristics in the current recession can be seen in the asset markets, especially in the stock market and the land market. The Tokyo Stock Exchange Price index (TOPIX) precipitated in January of 1990 after a long spell of price soaring in the preceding boom periods. The TOPIX declined by 57.8% from December of 1989, peak of the stock price, to August of 1992. The land price exhibited a similar pattern. The land price index of six largest cities rose at the rate of 24.5% per annum from September of 1985 to September of 1990, which was followed by a sharp decline. Many corporations which were given loans by the financial institutions on the security of land and stocks during the boom periods have become insolvent and some argue that it will lead to an instability of the financial system in Japan.

Thus there seems to be financial factors in addition to real factors such as insufficient level of effective demand underlying the current recession. That is why the current recession is often called "complex" depression. 1)

The purpose of this paper is to investigate the roles played by the asset markets in the recent cycle. As is stated above, the asset prices, in particular the stock price and the land price, showed an excessive fluctuations during the current business cycle. In the first place we will analyze whether the stock price fluctuations during the mid-80's to the early 90's were caused by a change of the fundamentals underlying the Japanese economy. If the answer to that question is no, then we pose the question: how did the divergence of the prices from the fundamentals affected the behavior of the economic agents? We tackle this problem by investigating the portfolio behavior of the corporate sector.

Secondly we will examine the effects of the market value of land held by the corporate sector on the business fluctuations. In particular we are interested in the role of land asset as a collateral. This aspect is analyzed by including the market value of land as one of the explanatory variables in the portfolio equations of the firm.

Let us summarize our main findings: 1) The stock prices diverged from the fundamentals to a large extent from the mid-80's to the early 90's. That is to say, it is highly likely that there existed bubbles in the stock market. Another finding is that the corporations responded differently to the change in the fundamentals and the bubbles. The bubbles turned out to exert a negative effect on the portfolio behavior of the corporations such as real investment, land purchase, and borrowings.

2) The land stock played an active role as a collateral in the portfolio behavior of the corporations. We obtained some evidence that a rise in land prices increased the value of land as a collateral and hence led to an increase of the real investment and borrowings of the corporations. The importance of land stock as a collateral was reinforced by two factors: the financial liberalization under way in the early to the middle of 80's and a rise in the stock prices. These factors enabled large companies to raise the funds directly from the capital market by issuing equity or bonds, which bin turn prompted the financial institutions to lend to the corporations that did not have direct access to the capital markets. The banks had not established the long-term, stable relationship with these corporations. Therefore the land asset held by the corporations, which was increasing in value at that time, played a collateral role and eased the agency costs arising from the information asymmetries between creditors and debtors. The loans received were then channeled toward the real investment and the financial investment.

3) The dependence of real activities such as investment on the asset prices works as amplifying the magnitude of the business cycle, since the asset prices move procyclically. The severity of the recession the Japanese economy has experienced results from this very dependence of real activities on the asset markets. The precipitation of the asset prices in the early 90's stripped off the collateral value of the assets held by the corporations and the deteriorating loans made the financial institutions quite cautious in further lending and it choked off the investment to a large extent.

The paper is organized as follows. Section 2 detects the characteristics intrinsic to the current recession and the preceding booms by comparing the current business cycles with those in the past. Section 3 and 4 analyze the roles played by the asset markets in the current business cycles. The effect of the asset prices on the portfolio behavior of the corporations are examined quantitatively in Section 5. Section 6 gives concluding remarks.

1)This naming of the current recession comes from the title of Miyazaki (1992) latest bestseller.

Structure of the whole text

  1. full text別ウィンドウで開きます。(PDF-Format 242 KB)
  2. page1
    1. Introduction
  3. page2
    2. Characteristics of the Contemporary Business Cycles
  4. 3. Role of Asset Markets in Business Cycles:
    1. page5
      (1)Collateral Role of Assets
  5. 4. Role of Asset Markets in Business Cycles:
    1. page7
      (2)Valuation in the Stock Market and Business
  6. page13
    5. Portfolio Behavior of the Corporation and Business Fluctuations
  7. page19
    6. Concluding Remarks
  8. page20
  9. page26
  10. page30
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