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Generational Dynamics Web Log for 20-Feb-07
Japan's real estate crash may finally end after 16 years

Web Log - February, 2007

Japan's real estate crash may finally end after 16 years

To see where America is going, look what happened in Japan.

During the 1980s, real estate prices in Japan skyrocketed in a huge real estate and stock market bubble. Both bubbles collapsed starting on January 4, 1990.

Economist Michael ("Mish") Shedlock in his blog has provided a graphical comparison to America's current real estate bubble to Japan's real estate bubble of the 1980s:

Japan nationwide land prices, 1979-2004

Japan nationwide land prices, 1979-2004

The above graphic shows Japanese land prices since 1979. The blue annotations are the things the Shedlock imagined people were saying in Japan at each point in the bubble. The red annotations show where in the Japanese bubble the American bubble is at different times.

He first posted this graph in Spring of 2005. At that time there was only one red label, the one for Spring 2005 (duh!).

He's updated it every six months or so. The latest update appeared in September, 2006.

As you can see, we have a very long way to go in our own real estate bubble crash.

It's interesting to look back over the last 20 years to news articles that came out at different times concerning Japanese land prices.

Here's an article from 1988 as prices were still rising:

"Land prices skyrocketed in Japan in 1987, the Government reported, with residential real estate rising 68.9 percent in Tokyo, nearly twice the previous high of 35.9 percent in 1973 and almost triple the 1986 increase of 23.8 percent. The National Land Agency, a Government office, released the 1987 statistics Thursday, the last day of the fiscal year in Japan.

Now, 18 years later, we can read this article, published on March 24, 2006:

"Japan: Land Prices Up In Big Cities
Commercial land prices in Tokyo rose last year for the first time in 15 years, while nationwide land prices fell at a slower rate amid a rebound in the country's economy, the government said. In the Tokyo area, commercial land prices rose 1 percent in 2005, according to data released by the Ministry of Land, Infrastructure and Transport. Prices in Osaka and Nagoya, two other major cities, also posted gains."

This appears to have been focusing on the positive, which is what always seems to happen.

In 1998, the mainstream media was still hopeful. Here's something from the August 22, 1998, edition of The Economist:

The plot thins.(sixth year of falling land prices in Japan)
BANKERS in Japan keep hoping that they have seen the worst of their bad-loan problems. And they keep being disappointed. That was the case once again this week, as the National Tax Administration Agency revealed that land prices in Japan have fallen for the sixth year in a row.
This matters. The banks are sitting on at least YEN 87 trillion ($600 billion) and possibly as much as YEN 140 trillion of suspect loans collateralised almost exclusively by land. As land prices spiral downward, the amount the banks can reasonably hope to recover is spiralling downward as well.

It just went on, year after year. Here's from March, 2003

Japan's land prices fall for 12th straight year.
Land prices in Japan fell for both residential and commercial areas in the year to Jan. 1, 2003, for the 12th straight year, reflecting the nation's prolonged economic slump, the Land, Infrastructure and Transport Ministry said in a report released Monday.
Residential land prices fell an average of 5.8%, a decline larger than the previous year's 5.2%....

Finally, here's news story from August 1, 2006, just six months ago:

Japanese land prices bounce back
Japanese land prices increased for the first time in 14 years in 2005, in another sign the world's second largest economy is continuing its recovery.
Prices had fallen since the "bubble economy" burst in the early 1990s.
Nationwide land prices on 1 January were up an average 0.9% from a year before, the National Tax Agency said. ...
Overall all Japanese land prices had fallen 3.4% in 2004. ...
The rise in prices was largely driven by increases in urban areas, such as Tokyo, Osaka and Kyoto, while prices in most rural areas remained on the slide.

So Shedlock's graph represents something real, not a manufactured story.

However, there's more to be told in comparing Japan to America.

Recall the reason that America's 1990s stock market bubble occurred in 1995: That was precisely the time that the generation of risk-averse senior financial managers who had lived through the 1930s Great Depression all disappeared (retired or died), leaving behind new risk-seeking financial managers. Thus, the new bubble occurred about 66 years after the 1929 crash.

Nikkei 225 Index -- Tokyo Stock Exchange -- 1984-2007 and 1914-2007.

Nikkei 225 Index -- Tokyo Stock Exchange -- 1984-2007 and 1914-2007.

Now take a look at the adjoining graphs. The top graph shows the Tokyo Stock Exchange's (TSE's) most recent stock market crash. The crash began on January 4, 1990. The Nikkei index had been 38915, and fell to a low of 7607 on December 31, 2003. That's an 80% fall over a 16 year period.

Now here's the point: This wasn't the TSE's first major stock market crash. The TSE's previous major stock market crash occurred in 1919, as shown by the lower graph. Then, 65 years later, the next stock market bubble began in 1984.

Did you get that? Wall Street: Crash in 1929, new bubble in 1995, 66 years later; Tokyo Stock Exchange: Crash in 1919, new bubble in 1984, 65 years later.

Once again, you can see Generational Dynamics in action. A new bubble occurs as soon the generation of people who lived through the last crash are gone.

I've said many times on this web site that analysts, journalists, and pundits are totally blind to even the simplest generational relationships, no matter how obvious they are.

Well, this one is about as obvious as it can get. This is the first time I've been able to track down the historical Nikkei index values, but once you have them, these generational relationships are pretty obvious. (20-Feb-07) Permanent Link
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Generational Dynamics Web Log for 20-Feb-07 Japan's real estate crash may finally end after 16 years

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Generational Dynamics Web Log for 20-Feb-07
Japan's real estate crash may finally end after 16 years