Land prices in central Tokyo are now at levels last seen in the mid-eighties. After a long slow climb during the decades of Japan’s economic miracle, prices exploded in the late eighties in the frenzy of the bubble economy. Over the following decade, prices collapsed by over 80%, touching a low in 2002. Since then, the market has recovered somewhat and levels in 2011 are about 150% higher than they were at the lows.
Bubble period (1982 to 1990)
Real-estate prices across Japan rose by as much as six to seven times during the 1980s asset bubble. Confidence was strong as the Japanese economic model, often referred to as “Japan Inc.” seemed to be invincible. Japanese corporations awash with cash made speculative purchases of real-estate and corporate assets all over the world. At home in Japan, low interest rates and loose monetary policy fueled a strong economy and high stock prices. Following the Plaza Accord in 1985, the yen appreciated from around 240 yen to the USD to about 120 yen in less than a year. In response, the Bank of Japan lowered interest rates from 5.5% down to 2.5% in 1987. This dramatic easing of monetary policy at a time of economic strength sparked an explosion of real-estate transactions and high stock prices. Adding fuel to the fire, the government under Prime Minister Nakasone, reduced corporate tax rates from 42% to 30% and slashed top marginal income tax rates from 70% to 40%. It was said at the time that the value of the Imperial Palace in Tokyo exceeded the value of all the real-estate in California. Land in Ginza 4 Chome was reported to have traded at JPY 90,000,000 ($750,000 at the time) per square meter.
As asset prices reached extreme levels the government tried to slow the growing bubble and introduced policies which led to the bursting of the bubble.
In 1990 the Ministry of Finance put restrictions on the total loan volume of real-estate lending (Soryo-kisei) which caused an immediate and dramatic drop in the availability of credit. Other government restrictions resulted in the need for buyers to seek approval from the local ward office for transactions of land size over 100 square meters. These restrictions brought the price rises to a grinding halt. The Bank of Japan also did their part tightening interest rates to peak of 6% in 1990.
In December 1989 the Nikkei average reached its all-time high of JPY 38,915. In the following nine months it crashed to below 20,000. Financial institutions were swamped with bad loans as asset prices tumbled. Land prices were slower to react but eventually started dropping and continued to slide downwards for the next ten years. By 1995 the Bank of Japan had dramatically reversed its monetary policy, slashing rates to a previously unthinkable 0.50% in a desperate effort to stem the slide of the economy and asset prices.
Mini Bubble (2002 to 2008)
The new millennium began but Japanese economy and asset prices failed to recover. In signs of desperation the Bank of Japan cut rates further to 0.1% and began extreme monetary policy in the form of QE (Quantative Easing). Around this time the J-Reit market began and the newly listed investment trusts caused a flurry of activity in the property market. In the early years of the new decade there were trillions of yen worth of securitized real-estate transactions done which lead to a mini “fund boom” in real-estate prices. These investment trusts focused their attention on assets in the major cities, prices in some parts of central Tokyo rose as much 70 to 100% compared to lows seen in 2002 but the overall market continued to languish.
Mini Bubble burst
By 2006 it seemed once again that a bubble was beginning so the MOF moved again to restrict investment real-estate loans. The global financial markets then took center stage as the US sub-prime loan scandal erupted in 2007 culminating in the “Lehman shock” of 2008. Foreign investors disappeared from the Japanese real-estate market as the securitized non-recourse lending market ceased to exist.
Real-estate prices in Tokyo once again slumped but did not return to the lows of 2002. By 2010 prices managed to stabilize at levels around 50% above the lows.
On March 11, 2011 the Tohoku region of Japan was devastated by an enormous earthquake, tsunami and the melt-down of the Fukushima nuclear power station. Tokyo also experienced a large tremor but buildings and infrastructure were largely unaffected. Initially the real-estate market froze as buyers were very nervous to commit in the wake of the disaster. As the situation stabilized and the recovery efforts in Tohoku commenced, real-estate transactions began again and the price level in Tokyo is basically unchanged from before the earthquake.