My Issue with Takahiro Miyao's Analysis

Craig Freedman (Professor, Macquarie University, Australia)

This comment originally appeared in the "Japan-U.S. Discussion Fourm" (http://lists.nbr.org/japanforum) on May 23, 2003: posted here with the author's permission.

Here's one of my issues with Takahiro Miyao's analysis (http://www.glocom.org/debates/20030519_miyao7/). I do believe that assets, particularly real estate does have a significant effect on aggregate demand through consumption. Recent empirical studies provide evidence for this in a number of countries, though I haven't seen any comparable work for Japan. But in every instance I can think of, the causation flows from increased aggregate demand leading to increased asset prices which feeds back to a further boost to aggregate demand. I can't think of an example where an economy saw asset led growth. What I mean is a case in which an exogenous boost in asset prices led to an increase in aggregate demand. I would be grateful if someone could supply me with some convincing evidence. Also, the discussion has been in broad macroeconomic terms. Namely boosting the average price of assets will lead to a boost in aggregate demand. I am still waiting for something like a detailed micro mechanism of how this will work in specific markets. Will banks lend more? Will there be an increased demand for loans? If so exactly what will cause this to occur?

Living in Sydney, a city where real estate has become something of a religion (and where I'm shunned as an atheist), I have seen households take on increasing debt levels, based on the assumption that the long housing boom here will simply continue. I have also seen increasing numbers of the younger generation being priced out of the housing market. Like everything else, there is a down side to any housing boom.