Further Comment on Asset Deflation

Takahiro MIYAO (Professor, GLOCOM)

This is from Mr. Miyao's comment, which appeared in the "Japan-U.S. Discussion Fourm" (http://lists.nbr.org/japanforum) on January 15, 2003: posted here with the author's permission.

I would like to respond to those who are essentially saying that the peak ("unrealistic") level of asset prices in the late 1980s and the early 1990s should not be used in the analysis of the Japanese economy and its problems. There are a number of ways to respond. Today I will restrict myself to the following three:

1) Whether unreasonable or not, those high asset prices can mainly explain the economic boom in the late 1980s and the early 1990s in Japan, and by the same token extremely depressed asset prices can explain the economic stagnation from the mid-90s until now. That's the argument about the balance-sheet recession. The point is not a moral (right or wrong) argument, but how to explain economic performance or problems.

2) In fact, for the sake of asset deflation argument, it is not necessary to mention the peak (bubble) price levels, but is enough to say that current asset prices in Japan are too low in the sense that, for example, real estate investment in Japan would yield a relatively high current returns, say 6-7% or higher, but capital losses are offsetting those current returns so that not many people are interested in investing in real estate in Japan. This might be called a "reverse bubble phenomenon." In other words, we have a negative asset deflation spiral, which should be stopped somehow before becoming too late. Having said this, I would like to add that comparisons between the peak and the current levels are important to measure the magnitude and speed of this asset deflation spiral and those of policy measures to stop and reverse such a spiral.

3) Speaking of policies, one of the key points about the current balance-sheet recession in Japan is that it is at least partly created and aggravated by mistaken and misguided policy measures. Precisely due to the argument that high prices of land and stocks are "unreasonable" and "unrealistic," the government and the Bank of Japan, adopted very restrictive policies towards the land and stock markets in the early 1990s after asset prices started to decline sharply and continued such policies too long, damaging the balance-sheets of banks, corporations and households, and leading to the serious balance-sheet recession. As I emphasized, Alan Greenspan and other U.S. policymakers, who have learned from Japan's policy mistake, carefully avoided too restrictive a policy, and quickly adopted a stimulative policy as soon as the market tide turned downward.