Japanese asset price bubble
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The Japanese asset price bubble (バブル景気 baburu keiki?, lit. "bubble economy") was an economic bubble in Japan from 1986 to 1991 in which real estate and stock market prices were greatly inflated. The bubble episode was characterized by rapid acceleration of asset prices and overheated economic activity, as well as an uncontrolled money supply and credit expansion. More specifically, over-confidence and speculation regarding asset and stock prices has been closely associated with excessive monetary easing policy at that time.
By August 1990, the stock index had plummeted to half its peak by the time of the fifth monetary tightening by the Bank of Japan (also known as BOJ). By late 1991, the asset price began to fall. Even though the asset price had visibly collapsed by early 1992, the economy's decline continued for more than a decade. This resulted in a huge accumulation of non-performing assets loans (NPL) which caused difficulties to many financial institutions. The bursting of the Japanese asset price bubble contributed to what many call the Lost Decade.
- 1 Background
- 2 Timeline
- 3 Identification
- 4 Causes
- 5 Aftermath
- 6 Notes
- 7 Additional References
- 8 External links
Early research has found that the rapid increase in Japanese asset prices was largely due to the delayed action by the BOJ to curb the issue. At the end of August 1987, the BOJ signaled the possibility of tightening the monetary policy but decided to delay the decision in view of recent economic uncertainty related to Black Monday (October 19, 1987) in the US.
More recent research supports an alternate view, that BOJ reluctance to tighten the monetary policy was in spite of the fact that the economy went into expansion in the second half of 1987. The Japanese economy had just recovered from the brief (1985-1986) “endaka recession” (日本の円高不況 Nihon no endakafukyō?, lit. “recession caused by appreciation of Japanese Yen”). The “endaka recession” has been closely linked to the Plaza Accord (September 1985) – which led to the strong appreciation of Japanese yen.
The strong appreciation of the Japanese yen, however, eroded the Japanese economy since the Japanese economy was led by exports and capital investment for export purpose. In fact, in order to overcome the “endaka” recession and stimulate the local economy, an aggressive fiscal policy was adopted—mainly through expansion in public investment. Simultaneously, BOJ had declared that curbing Japanese Yen’s appreciation was the “national priority”. To prevent the Japanese Yen from appreciating further, the monetary policy maker had pursued aggressive monetary easing; slashed down the official discount rate to as low as 2.5% by February 1987.
The move clearly failed to curb further appreciation of the Japanese Yen (refer to the table below) as the Japanese Yen further appreciated from 200.05 ¥/U$ (first round monetary easing) to 128.25 ¥/U$ (end of 1987). The course only reversed by the spring of 1988, when the US dollar began to strengthen against the Yen. Some researchers have pointed out that "with exception of the first discount rate cut, the subsequent four are heavily influenced by the US: second and the third cut was a joint announcement to cut the discount rate while the fourth and fifth was due to joint statement either Japan-US or G-7". It has been suggested that the US exerted influence to increase the strength of the Japanese Yen, which would help with the ongoing attempts to reduce the US-Japan current account deficit. Indeed, almost all discount rate cuts announced by the BOJ explicitly expressed the need to stabilize the foreign exchange rate, rather than to stabilize the domestic economy.
Later, BOJ hinted to the possibility of tightening the policy due to inflationary pressures within its domestic economy. Despite leaving the official discount rate unchanged during the summer of 1987, the BOJ had expressed concern over excessive monetary easing, particularly after the money supply and asset prices rose sharply. Nonetheless, Black Monday in the US triggered a delay for BOJ to switch into monetary tightening policy. BOJ officially increased the discount rate on March 31, 1989.
|1986||200.05 ||184.62||178.83 ||175.56 ||166.89||167.82||158.65||154.11||154.78||156.04||162.72 ||162.13|
|1987||154.48||153.49 ||151.56||142.96||140.47||144.52||150.20||147.57 ||143.03||143.48 ||135.25||128.25|
|1989||127.24||127.77||130.35||132.01 ||138.40 ||143.92||140.63||141.20||145.06||141.99 ||143.55||143.62 |
|1990||145.09||145.54||153.19 ||158.50||153.52||153.78||149.23||147.46 ,||138.96||129.73||129.01||133.72|
|||Plaza Accord in September 22, 1985|
|||First round monetary easing (January 30, 1986): Official discount rate cut from 5.0% to 4.5%|
|||Second round monetary easing (March 10, 1986): Official discount rate cut from 4.5% to 4.0% simultaneously with FRB and Bundesbank|
|||Third round monetary easing (April 21, 1986): Official discount rate cut from 4.0% to 3.5% simultaneously with FRB|
|||Fourth round monetary easing (November 1, 1986): Official discount rate cut from 3.5% to 3.0%|
|||Fifth round monetary easing (February 23, 1987): Official discount rate cut from 3.0% to 2.5% in accordance to Louvre Accord (February 22, 1987)|
|||BOJ signalling possible monetary tightening|
|||Black Monday (NYSE crash) in October 19, 1987|
|||Consumption tax introduced|
|||First round monetary tightening (May 30, 1989): Official discount rate hike from 2.5% to 3.25%|
|||Second round monetary tightening (October 11, 1989): Official discount rate hike from 3.25% to 3.75%|
|||Third round monetary tightening (December 25, 1989): Official discount rate hike from 3.75% to 4.25%|
|||Fourth round monetary tightening (March 20, 1990): Official discount rate hike from 4.25% to 5.25%|
|||Fifth round monetary tightening (August 30, 1990): Official discount rate from 5.25% to 6.00% due to Gulf Crisis|
|||Stock price tumbled to half the level of the peak|
The 1985-1991 asset price bubble affected the entire nation, though the differences in the impact depended on three main factors: the size of the city itself, the geographical distance from Tokyo metropolis and Osaka, and the historical importance of the city in the central government’s policy. Cities within prefectures closer to the Tokyo metropolis experienced far greater pressure in the asset prices compared to the cities located in prefectures further from Tokyo metropolis.
For definition purposes, Japan Real Estate Institute has classified Tokyo metropolis (including 23 special wards), Yokohama (Kanagawa), Nagoya (Aichi), Kyoto (Kyoto), Osaka (Osaka), and Kobe (Hyogo) as the six major cities. These six major cities experienced far greater asset prices inflation compared to other urban land nationwide. By 1991, commercial land prices rose 302.9% compared to 1985, while residential land and industrial land price jumped 180.5% and 162.0%, respectively, compared to 1985. Nationwide, statistics showed that commercial land, residential land and industrial site land prices were up by 80.9%, 51.1%, and 51.7%, respectively. The three main factors: size of the city, geographical location and the importance of the city under the central government’s policy can be illustrated as below.
By the early 1980s, Tokyo was an important commercial city due to high concentration of international financial centre within Tokyo commercial districts. The demand for office spaces continued to soar as more economic activities flooded the Tokyo commercial districts, resulting in demand outstripping the supply. The government policies to solely concentrate its economic activities in Tokyo, and the lack of diversification of economic activities to other local city are also partly to be blamed for the bubble crisis.
By 1985, lands within Tokyo commercial districts were unable to fulfill the market demand. As a result, land prices in Tokyo commercial districts increased sharply within a year. Average per 1 sq. metre for lands in Tokyo commercial districts in 1984 was 1,333,000¥ (U$5,600 assuming in 1984 that 1 U$=238¥). In just a year, average per 1 sq. metre for lands in Tokyo commercial districts increased to 1,894,000¥ (U$7,958 assuming in 1985 average 1 U$=238¥). This roughly translate to an approximately increase of 42%/sq. metre over just a year. By 1986, average per 1sq. metre for lands in Tokyo commercial districts had gone up to as high as 4,211,000¥ (U$25,065 assuming 1986 average 1 U$=168¥), a jump of 122% compared to 1985. Residential land jumped from an average 297,000¥/ U$1,247 per 1 sq. metre (in 1985) to 431,000¥/ U$2,565 per 1 sq. metre (in 1986), an increase of 45%.
Moving southwards, Osaka (Osaka prefecture) also experienced a rapid growth in land prices, especially in commercial districts. Land prices in Osaka gained 35% as the land prices costs 1,159,000¥/1 sq. metre (1986) from an average 855,000¥/1 sq. metre (1985). Note here that Osaka uniquely had historical importance as commercial center in Japan; hence lands in Osaka tend to be higher than most urban land in Japan.
By 1987, virtually all land within the Tokyo metropolis was unable to cope with demand. At this point, residential land in Tokyo had increased to 890,000¥/1 sq. metre (U$6,180 based on assumption 1U$ = 144¥) and commercial land 6,493,000¥/1 sq. metre (U$45,090). Consequently, investors flocked to prefectures surrounding the Tokyo metropolis especially prefectures within the Greater Tokyo Area. Prefectures located in Southern Kanto were more favourable to investors compared to Northern Kanto. Hence land in cities like Yokohama (Kanagawa prefecture), Saitama (Saitama prefecture), and Chiba (Chiba prefecture) tended to be more expensive than cities like Mito (Ibaraki prefecture), Utsunomiya (Tochigi prefecture) and Maebashi (Gunma prefecture). For instance, in 1987, commercial land prices in Yokohama (average 1 sq. metre) 1,279,000¥, Saitama 658,000¥ and Chiba 1,230,000¥. On the other hand, commercial land prices in Mito (average 1 sq. metre) 153,000¥, Utsunomiya 179,000¥ and Maebashi 135,000¥ in 1986. This meant that areas located closer to the Tokyo metropolis tended to be more favorable compared to areas further from the Tokyo metropolis.
Osaka continued to enjoy an increase in land prices especially in the commercial area, as the land prices shot up to 2,025,000¥/1 sq. metre in 1987. Kyoto (Kyoto prefecture) and Kobe (Hyogo prefecture) also enjoyed a sharp increase in land prices, especially in commercial areas which gained 31% and 23%, respectively. The effect of the bubble in Osaka spread as far as Nagoya (Aichi prefecture) which saw the commercial land prices gain as much as 28% compared to 1986.
The first sign of a possible bubble collapse appeared in 1988. By this time, non-prime land prices in Tokyo had reached their peak, though some areas in the Tokyo wards started to fall, albeit by a relatively smaller percentage. Prime land in Ginza district and areas in Central Tokyo continued to rise. Urban land in other cities, at this point, remained unaffected by the situation faced by the Tokyo metropolis. In Osaka, for instance, the commercial land and residential land prices had increased by 37% and 41% respectively.
By 1989, land prices in commercial districts in Tokyo began to stagnate, while land prices in residential areas in Tokyo actually dipped 4.2% compared to 1988. Land prices in prime area in Tokyo also peaked around this time, as Ginza district being the most expensive district peaked at 30,000,000¥/1 sq. metre  (U$218,978 based on assumption 1U$ = 137¥). Yokohama (Kanagawa prefecture) experienced a slowdown due to its location closer to Tokyo. Saitama (Saitama) and Chiba (Chiba), at this point, still chalked up healthy gain in land prices. All other urban cities in Japan had yet to see the impact of slowdown in Tokyo.
Between 1990 to mid-1991, most urban land had already reached the peak. The lag effect from the fall of Nikkei 225 pushed down the prices of urban land in most part of Japan by the end of 1991. The bubble collapse were officially declared in early 1992 – as land prices dropped the most in this period. Tokyo experienced the worst from the catastrophic in Japanese economic history. Land prices in residential area on average 1 sq/metre slid 19% while commercial land prices declined 13% compared to 1991. Overall land prices in residential area and commercial districts in Tokyo fell to the lowest level since 1987.
In the 1980s, the direction of stock prices in Japan was largely determined by the asset market (explicit reference to the land prices) in Japan. Judging on the monthly performance of Nikkei 225 in 1984, the index largely moves within 9900-11,600 range. As the land prices in Tokyo began to rise in 1985, the stock market also moved in the same direction. Indeed, the Nikkei 225 managed to surge past 13,000 by December 2, 1985.
The major surge was obvious by 1986, as the Nikkei 225 gained close to 45% within a year. The trend continued throughout 1987, touched as high as 26,029 by early August  before being dragged down by the NYSE Black Monday. The strong rally throughout 1988 and 1989 helped the Nikkei 225 to touch another new record high at 38,957.44 on December 29, 1989 before closing at 38,915.87. This translated to a gain of more than 224% since January 2, 1985. Some researchers concluded the unusual stock prices are likely due to the rise in land prices since the corporations’ net assets increases, hence pushing the stock prices upward. As long as the asset prices continued to strengthen, investors would more likely be attracted to speculate the stock prices. However, this also portrays the weaknesses of corporate governance in Japan itself.
On the downside, the monetary tightening policy in 1989 seemed to have some effect on the stock prices. As lending costs increased drastically, coupled with a major slowdown in land prices in Tokyo, the stock market prices began to fall sharply in early 1990. The Nikkei 225 slid to 23,849 (December 2, 1990) from the opening of 37,189 (January 4, 1990), which resulted Nikkei 225 lost more than 35% of its value within just a year. Consequently, the stock prices had officially collapsed by 1990. The downside trend continued even into 1991 as the Nikkei 225 slid down to as low as 22,687 in November 1, 1991.
Money supply and credit
Initially the growth of money supply (M2+CDs) decelerated in 1986 (the lowest growth rate was 8.3 percent in October–December 1986) which marked the end of brief “endaka recession”. The trend was gradually reversed as it accelerated afterwards and exceeded 10 percent in April–June 1987.
The growth of credit was more conspicuous than that of money supply. During the bubble period, bank are increasing borrowing activity and at the same time, also financing from capital markets substantially increased against the backdrop of the progress of financial deregulation and the increase in stock prices. As a result, the funding of the corporate and household sectors rapidly increased from around 1988 and recorded a rate of growth close to 14 percent on a year-on-year basis in 1989. Money supply continued to increase even after BOJ tightened its monetary policy and reached the peak in 1990, thereafter continuing to mark still double-digit growth until the fourth quarter. Money supply and credit dropped sharply by 1991, as bank lending began to drop due to a shift in bank lending attitude.
The accelerating growth in terms of Japanese asset price is closely associated with a significant drop in short-term interest rates notably between 1986 and 1987. The BoJ had slashed the official discount rate from 5.00% (January 30, 1986) to 2.50% (February 23, 1987). The official discount rate remained unchanged till May 30, 1989.
Summary of BOJ official discount rate 
|Effective date||Official discount rate|
|January 30, 1986||5.00% to 4.50%|
|March 10, 1986||4.50% to 4.00%|
|April 21, 1986||4.00% to 3.50%|
|November 1, 1986||3.50% to 3.00%|
|February 23, 1987||3.00% to 2.50%|
|February 24, 1987 – May 30, 1989||Unchanged at 2.50%|
With the exception of the first discount rate cut, most of the discount cut was closely motivated by the international policy action to intervene in the foreign exchange market. Despite aggressive monetary easing by BOJ, the U$ slid as much as 35% from ¥237/U$ (September 1985) to ¥153/U$ (February 1987).
Consequently, the move by the BOJ was heavily criticized since such move appeared to influence the outcome of the yen, a much neglected domestic factor. As a result of such move, the money growth had become out of control. In the beginning of 1985-1987 periods, money growth had been lingering around 8% before being pushed up to more than 10% by the end of 1987. By early 1988, the growth had reached about 12% per annum.
The Bank of Japan has also been criticized for their role in fuelling the asset bubble in Japan. The economic mix policy has been inappropriate due to apparent goal seems to be lending to bow to international standard to boast domestic growth and strengthening the Japanese yen. Economic analysis has been in favour of expansionary fiscal policy and tighter monetary policy rather than repeated expansionary rate cuts while leaving the fiscal policy unchanged.
Thus, the movement of BOJ to appreciate the Japanese yen rather than stabilizing the asset price inflation and overheating meant little could be done during the peak of the crisis. Despite the Bank of Japan stepping in to hike the interest rate by May 31, 1989, it seemed to have little effect on the asset inflation. Indeed, land prices continued to rise till the early 1990s.
Distortions in the tax system
Japan has one of the world's most complicated taxation systems, with its property tax provisions deserving specific mention. These provisions have been widely abused for speculation and have contributed to costlier land, especially within urban areas.
The inheritance tax is very high in Japan, reported to be 75% of the market price for over 500 million yen until 1988 and it is still 70% of the market price for over 2 billion yen. Yet the appraisal of land for tax purposes used to be about one-half of the market value and the debt was considered at face value during the bubble period. In order to evade inheritance tax, many wealthy individuals opt to borrow more money (since the interest rate was far lower), hence reduced much exposure to inheritance tax.
Furthermore, given that capital gains on the land are not taxed until the time of sales and interest rate payments can be deducted from taxable income for companies and individuals investing in asset (condominium and office), this has offered more incentive for wealthy individual and company to speculate the asset price. The Japanese property tax stipulated that the statutory standard property tax stands at 1.4%. However, in terms of effective property tax, it is much lower than the published statutory property tax.
As a rule of thumb, in the 1980s, local government imposed 0.1% of the market price land. Since the valuations did not rise in tandem with the actual rising market price, the effective property tax would regress over the time. As a result, for instance, in the Greater Tokyo area has dropped to 0.06% of the market price. As the land price escalates much quicker than the tax rate, most Japanese would consider lands as asset than for production purpose. The reason is simple: strong expectation that the land prices are likely to escalate, coupled with minimum property tax, it makes more sense to speculate the land price than to fully utilize the land for production purposes.
The land lease law
As provided under the Japan Civil Code, the rights of lessee and tenant are protected under the Land Lease Law. This law can be traced back during the World War II, whereby most house heads were conscripted for military duty leaving their families in danger to be thrown out from their leased land. For this reason, land leasehold contract is automatically renewed unless the landlord provides concrete reasoning to object upon the land lease contract lapsed.
In any cases, in the event of dispute between the lessee and tenant, court may summon for a hearing in order to ensure that the rent is “fair and reasonable”. Upon the rent is set by the court, tenant would pay according to the rent set by the court, which means landlords may not raise the rent more frequently according to the actual market price. Hence, the rent are actually kept “artificially low” and market fails to respond according to the rental price set by the market. For such reason, many landlords refused to rent out their land for such steep discount price, but rather leaving the land deserted to reap for huge capital gain should the land price increased sharply.
Changes in the bank behaviour
Traditionally, Japanese are well known to be a great deposit saver. However, the trend seems to reverse by the late 1980s as more Japanese opt to shift the funding from the banks to the capital market – leading banks in a tight squeeze as the lending costs are more expansive with shrinking customer base.
In fact, the bank behaviour has gradually become aggressive since 1983 (even before the monetary easing policy in Japan) after the ban on fund-raising in the securities market were lifted around 1980. However, major firms were not keen to utilize the bank as the source of funding. For this reason, banks were forced to aggressively promote loans to smaller firms backed by properties. Soon, especially around 1987-1988, banks were more even more aggressive to lend loans to individuals backed by properties. Evidently, even an ordinary salaryman can easily borrow up to 100 million yen for any purposes provided his house was used as collateral.
Consequently, this has adverse impact of the whole Japan asset bubble. Firstly, cheap and easily available loans reduced the funding costs for the purpose of speculation. Secondly, stock rises, coupled by low interests rate, reduced the capital costs and aided financing capital market (e.g. convertible bonds, bonds with warrants etc.). Thirdly, combination of rise in land and stock prices pushed up the value of assets held by corporate; in which effectively increased their sources of funding since such these increased the collateral value of the assets.
The asset price burst seems to exert a great effect on the overall Japanese economy. By 1992, the urban land price nationwide declined 1.7% from the peak. However, the impacts are worse for land in the six major cities as the average land prices (commercial, residential, and industrial) dropped 15.5% from its peak. Commercial, residential and industrial land prices dropped 15.2%, 17.9%, and 13.1%, respectively.
The entire asset prices crisis was far worse, especially in large business districts of Tokyo. By 2004, prime "A" property in Tokyo's financial districts had slumped to less than 1 percent of its peak, and Tokyo's residential homes were less than a tenth of their peak, but still managed to be listed as the most expensive in the world until being surpassed in the late 2000s by Moscow and other cities. However, since 2012, Tokyo is once again, the world's most expensive city, followed by Osaka with Moscow as number 4. Tens of trillions of dollars worth were wiped out with the combined collapse of the Tokyo stock and real estate markets. Only in 2007 had property prices begun to rise; however, they began to fall in late 2008 due to the global financial crisis.
Household/Corporate balance sheet
The entire crisis also badly affected the direct consumption and investment within Japan. As a result, from a prolong decline in the asset prices, there was a sharp decline in the consumption propensity, in which resulted in long term deflation in Japan. The asset prices burst also badly affected the consumer confidence since a sharp dip in asset prices (land, housing and stock) has reduced the household real income.
At the same time, since the economy driven by its high rates of reinvestment, this crash hit particularly hard. This apparently obvious especially the Nikkei 225 at the Tokyo Stock Exchange plunged from the height of 38,915 at the end of December 1989 to 14,309 at the end of August 1992. By 11 March 2003, it plunged to the post-bubble low of 7,862 on March 11, 2003. As investments were increasingly directed out of the country, manufacturers were facing difficulties to uphold its competitive advantage since most manufacturing firms lost some degree of their technological edge. Consequently, Japanese products became less competitive overseas.
The post-bubble crisis also had adverse impact on the corporate balance sheet. During the asset- bubble period, most Japanese corporate balance sheet was backed up assets held by the corporate. Hence, the asset prices may influence the corporate balance sheet. Owing to lacking of corporate governance within Japanese corporate, most Japanese corporate had an inclination to convince investors with its healthy balance sheet, since most investors believe that such prices are likely bullish. An important aspect from the bubble collapse was the deterioration in terms of balance sheet. It was important to note that since the prices of assets tumbled, increasing liabilities on long term basis projected a bad balance sheet to investors. Many Japanese corporate were facing huge difficulties to reduce the debt ratio – resulting reluctance from private sectors to increase investments.
Financial and banking sector
The easily obtainable credit that had helped create and engorge the real estate bubble continued to be a problem for several years to come, and as late as 1997, banks were still making loans that had a low probability of being repaid.Loan officers and investment staff had a hard time finding anything to invest in that would return a profit. They would sometimes resort to depositing their block of investment cash, as ordinary deposits, in a competing bank, which would bring howls of complaint from that bank's loan officers and investment staff. Correcting the credit problem became even more difficult as the government began to subsidize failing banks and businesses, creating many so-called "zombie businesses". Eventually a carry trade developed in which money was borrowed from Japan, invested for returns elsewhere and then the Japanese were paid back, with a nice profit for the trader.
The post bubble crisis also claims several victims such as Sanyo Securities Co., Hokkaido Takushoku Bank, and Yamaichi Securities Co. in November 1997. By October 1998, the failure of the Long-Term Credit Bank of Japan as well as Nippon Credit Bank in December the same year worsened the financial system unrest, drastically deteriorating consumer and business sentiment and dealing a heavy blow to the real economy. To fuse the crisis, the government injected a total of 9.3 trillion yen in public funds into major banks in March 1998 and March 1999.
The lost decade
Beyond 1991, after the Japanese bubble's collapse (バブル崩壊 baburu hōkai?, lit. "bubble collapse"), which occurred gradually rather than catastrophically, is known as the lost decade (失われた十年 ushinawareta jūnen?, lit. "Lost Decade") in Japan.
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