Asset Price Bubble in Japan in the 1980s

IMES DISCUSSION PAPER SERIES

Asset Price Bubble in Japan in the 1980s: Lessons for Financial and Macroeconomic Stability
Shigenori Shiratsuka Discussion Paper No. 2003-E-15

INSTITUTE FOR MONETARY AND ECONOMIC STUDIES BANK OF JAPAN
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IMES Discussion Paper Series 2003-E-15 December 2003

Asset Price Bubble in Japan in the 1980s: Lessons for Financial and Macroeconomic Stability
Shigenori Shiratsuka* Abstract This paper reviews the implications of asset price fluctuations on financial and macroeconomic stability, based on Japan’s experience of the asset price bubble. Japan’s experience of asset price bubble is characterized by euphoria, that is, excessively optimistic expectations with respect to future economic fundamentals, which lasted for several years and then burst. Under such circumstances, policymakers are unlikely to take an appropriate policy response without evaluating whether asset price hikes are euphoric or not, and forecast a correct path for the potential growth rate. In so doing, it is deemed important to assess the sustainability of financial and macroeconomic stability. Keywords: Asset price bubble; Financial stability; Macroeconomic stability, Sustainability. JEL Classification Codes: E31, E44, E58, E63, G18

*

Deputy Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:[e-mail])

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This paper is prepared for the IMF/BIS Conference on Real

References: 15 Garber, Peter M., Famous First Bubbles: The Fundamentals of Early Mania, Cambridge: The MIT Press, 2000 16 Saito, Makoto, and Shigenori Shiratsuka, “Financial Crises as the Failure of Arbitrage: Implications for Monetary Policy,” Monetary and Economic Studies, 19 (S-1), Institute for Monetary and Economic Studies, Bank of Japan, 2001, pp 2 Default probability (’8589) 3 Default probability (’9094) assuming deterioration of the credit situation of the construction, real estate and finance-related industries The same as above 10.5 Source: Table 2 in Shimizu and Shiratsuka (2000)