Chapter 61 – The Bubble Insanity


Something wrong with the Japanese mentality?

1. The Tanaka Kakuei boom
2. Asset Price Insanity Begins
3. Bubble Beginnings
4. Bank Foolishness
5. The EIE Scandal
6. Bloated Collateral Values
7. The Anti-Bubble Realists
8. The Shiodome Fiasco
9. Mythical Assets (Fukumi Shisan)
10. The ‘Resort’ Boom
11.’Yutori’ to the rescue
12. Bubble Finale

The stock-market was one problem. Land booms were to be another.

Japan seemed unable to generate for itself the healthy domestic demand crucial to any advanced economy.

It had tried to rely heavily on exports (foreign demand), which ultimately was self-defeating due to the pressure to over-value the yen.

Now increasingly it was beginning to rely on unhealthy inflations of stock-market and land prices.

Eventually they were to create an economic monster – the Bubble – that would cripple the economy for more than a decade.

1. The Tanaka Kakuei Boom

My first exposure to a Made-in-Japan land boom had been the Tanaka Kakuei ‘retto kaizo’ (archipelago rebuilding) boom of the early 1970’s.

The Tanaka rebuilding plan made sense. It envisaged a network of high-speed highways and train-lines across the nation. Without it, Japan today would be very deprived nation.

Even so, Tanaka continued to be criticised.  He was also blamed for the serious inflation, mainly oil-shock caused, which hit the nation a year later

But for Japan’s hungry speculators Tanaka’s transport improvement plans also became the excuse they needed to start moving.

The new train and highway connections which Tanaka had promised would require large amounts of land, they argued. 

So all land prices were bound to rise, even if much of the land had nothing to do with the new transport links.

That boom suffered a mini-collapse in the mid-seventies, partly as a result of Tanaka’s 1974 downfall. But land prices soon resumed their upward course.

Japan was still fixated on the belief that despite occasional ups and downs, land prices in the long term would inevitably keep on rising.

‘Japan is a small island with limited land space’ and ‘We can make other things but we cannot make land’ were the underlying slogans.

I was to be a partial victim – having to buy into relatively high priced Tokyo land during yet another period of land price inflation, this time in the early 1980’s, simply to get the living space needed for myself and a family.

But I would have suffered more if I had waited more years.

2. Asset Price Insanity Begins

Sometime in the late eighties, we were being forced to realise that something more than Tanaka rebuilding plans was influencing asset (mainly land) prices.

Not only were they being forced to absurd levels by Western standards; even by the Tanaka land boom standards of the early seventies they were unrealistic.

Eventually we were looking at land prices that said the total value of land in Japan was equal to four times the total value of all land and resources of the USA.

Tokyo was worth more than all of California.

The land underneath the Imperial Place was worth more than all of Canada. And so on.

The stock-market index was to rise to almost 40,000 (to put that figure in perspective, it was later to fall to around 7,000).

Several factors seemed involved.

One was the over-confidence born from seeming US impotence before Japan’s export onslaught.

It was greatly reinforced by the ‘Japan As Number One’ mentality – the title of an adulating book by Harvard academic, Ezra Vogel. 

(Vogel, like some other Japan-watchers of Japan’s so-called enigma, failed to realise the emotional irrationality that underlay so much of Japan’s behaviour in those days.) 

Indeed, one of the stock-market’s many jumps in that period was attributed specifically to that Vogel book’s publication.

If Japan was Number One, the reasoning said, then there was even more reason for Japan to ignore Western logic and continue grossly to over-price assets.

Details like PERs, dividend returns and sensible asset profitability formulas became irrelevant.

At some stage an enterprising journalist (I think he was with Nikkei) began to use the word Bubble to describe what was happening. It stuck, and rightly.

In the West, bubbles might eventually collapse. But Japan was different.

Japan’s Bubble would last forever.

3. Bubble Origins

Ironically it was the West, largely in the form of the US, that helped create the Bubble.

To correct the trade imbalances, Washington in the late eighties had decided to tell Japan how to run its economy.

And to be fair, the US reasoning about the main cause of the trade imbalance made some sense – the weakness of domestic demand in Japan.

The problem lay with the prescribed US remedy. 

This said Japan should keep interest rates low and increase money supply. That would expand domestic demand, which in turn would help reduce the pressure to export and increase pressure to import.

Japan’s progressive and intelligent finance minister (Miyazawa Kiichi) went along with the US advice even though he feared an inflationary result. 

As one of the postwar progressives influenced by Keynesian views, Miyazawa was very conscious of demand problems.

But his aim was not just to appease the angry Americans by expanding demand, (though Miyazawa did have pro-USA attitudes).

Any reduction in export surpluses would also help reduce the relentless rise in the value of the yen which in turn was doing grave damage to marginal exporters.

Endaka fukyo’– recession due to the expensive yen – was the buzz word in those days.

By accepting the US advice Miyazawa would hope to kill two birds with one stone -the ‘endaka fukyo’ problem and the trade balance problem.

Incidentally, Miyazawa’s Keynesianism – his emphasis on demand as a key economic variable – was influenced by the views of my father, Colin Clark.

If I know something about this it is due to my getting to know a close Miyazawa friend, Tokyo Stock Exchange head, Taniuchi. 

He told me how university graduates like Miyazawa entering the Finance Ministry in the immediate postwar years were required to spend two years on an economic research project.

(It was a good idea, worthy of revival. Nowadays most entrants to the Ministry come from the Tokyo University law department, which provides them with little background in business or economics.

(That in turn could be a major reason why the Ministry bureaucrats today manage to mishandle the economy so consistently.)

Miyazawa’s research project was the Keynesian writings of my father.

(In the thirties my father had been working with Keynes in Cambridge.) 

Years later I was to be given a copy of Miyazawa’s research report by Taniuchi. It was a neat piece of research.

In my occasional meetings with Miyazawa over the years he would mention my father warmly.

Normally some easing of monetary policy would be harmless enough. It would help expand the domestic demand needed to reduce trade surpluses.

But the easing coincided with the Japan-as-Number-One fever still being whipped up by those land and stock-market speculators.

Miyazawa would have known about their existence.

But I doubt if any of us realised that a relaxation in monetary policy would see those speculators go so insane – that they would trigger a speculative Bubble of such enormous size and irrationality.

4. Bank Foolishness

It began with the banks.

Flush with money, and with government policy now calling for them to expand lending quickly, they were only too happy to oblige.

But with ‘endaka fukyo’ fears still hanging over the economy, the people who wanted to borrow were not the people keen to make the goods and services needed to stimulate the economy.

They were Japan’s parasitical land and share speculators (and the resort developers, of which more later).

Soon a classic vicious circle got underway.

The more the banks loaned, the more asset prices rose. The more asset prices rose, the more Japan’s bankers could lend on the basis of increased collateral value.

You judge the degree of risk by watching what everyone else is doing. If everyone is doing the same thing then it cannot be risky. 

You go with the crowd.

Or as the Japanese themselves put it, even if the signal is red it is OK to cross the road if everyone else is crossing.

(‘Momentum market’ theorists would have a field day in Japan.)

The result was that whether in Japan or abroad Japanese buyers were usually in there with everyone else buying all the way to the top of a boom, and refusing to buy at the bottom.

They found it hard to operate counter-cyclically.

(This was also true for many years in Australia’s wool markets, where the Japanese were major buyers. Market fluctuations were much larger than normal supply and demand would seem to require.

(Exaggerated wool market fluctuations were also a problem for the economy generally.) 

(It was also noted how market fluctuations were fortunately eased by Overseas Chinese speculators – selling when the Japanese were buying and buying when the Japanese were selling.

(The Overseas Chinese were better able to think counter-cyclically, it seems.)

5. The EIE Scandal

One of the key Japanese speculators was an outfit called EIE.

An obscure Osaka-based company, it suddenly came out of nowhere to begin spending hundreds of millions on Australian hotels, resorts, golf courses – anything it could get its hands on.

And not just in Australia. It was also scouring the south and central Pacific for purchases.

No one seemed to know the source of its funds. And because of the inflationary impact of its activities, Canberra wanted to investigate.

My former newspaper, The Australian, became involved. I was asked to help.

Our general assumption was that the funds had to be black Korean political money channeled into Japan by Osaka Koreans. Or maybe it was Osaka gangster money (Tokyo gangsters were already fairly committed).

None of us imagined that it was being loaned by the seemingly responsible government-funded Long Term Credit Bank of Japan, simply as a result of the EIE owner having a friendship with a corrupt LDP politician (and later prime minister), Takeshita Noboru.

EIE’s collapse led to LTCB’s collapse, with something like five trillion yen in bad debts – one of the larger of the many post-Bubble financial scandals to hit Japan.

6. Bloated Collateral Values

True, not all speculators operated on the grand scale of EIE.

Many were small-time, semi-gangster outfits, amply assisted by Japan’s primitive and corrupt banking system.

For example, A-san would want to borrow say 80 million yen to buy land already over-priced at 100 million yen. Banks were only too happy to lend, assuming prices would go even higher.

And sure enough, within a year or so that land would be even more over-priced, at say 200 million.

Excited by his instant paper profits, A-san would then want to use that land as collateral to borrow more money to buy more land.

Anywhere else in the advanced economies, bankers would smell risk and cut collateral values relative to market prices. 

For example, that block of land now badly over-priced at 200 million would be given a collateral value of much less than 200 – say 120 million.

But not in Japan.

Impressed by the price jump from 100 to 200, and convinced land prices would indeed rise forever, bankers would offer A-san not just 200 but also a further 20 percent on top, say to 240 million.

In other words, it was assumed that when A-san came to sell the land it would indeed be worth 240 million, or more.

Armed with his alleged 240 million yen asset,  A-san would soon be out looking for more land to buy and use as collateral for more loans, to buy even more grossly over-priced land.

(Some argue that the US sub-prime mortgage loan scandal was equally irrational. But here at least the loans were for income-producing properties. In Japan loans were available for any purpose.) 

As prices moved into the stratosphere, the tribally collectivist commentators would then chime in saying that the continued rise in prices proved it was quite reasonable and rational for prices to be so high, and for banks to lend so foolishly.

After all Japan was a small island….you could make cars but you could not make land, so land prices were bound to rise forever etc.….

One of those commentators was the well-known, Nikkei-connected and usually very sensible, Kozai Yutaka. 

But even he could not get it right. He said that even if prices seemed inflated, those prices had to be correct because they were the result of free market movements, and markets could not be wrong.

When I saw that even an economist of his conservatism had bought the market fundamentalism coming out of the US I realised the Bubble was going to be around for some time.

7. The Anti-Bubble Realists. 

Fortunately  a small group of economists disagreed with the madness going on around them.

The ‘tochi shinwa’ – the myth (shinwa) that land prices would rise forever – was how they labeled it.

But most drew back from open policy criticisms.

Those willing to come out in public and sound a warning of future disaster could be counted on the fingers of one hand, my hand – Noguchi Yukio, Kobayashi, Miyao Ryuzo…..

We would meet occasionally, and shake our heads in disbelief about what was going on around us. But few were willing to go public.

In the Japan of those days people did not try to contest conventional wisdoms.

Japan – Surplus Land?

Whenever I had a pulpit I would try to shock audiences by arguing that Japan was awash with surplus land.

And not just remote rural land in Hokkaido. The land was near central Tokyo, just minutes from the land boom center.  

The proof? Just take a short walk in Tokyo’s Kanda district, a few blocks from the CBD banks and newspaper offices that were telling us that Japan had no surplus land and that the land boom would last forever.

Almost the entire area was an ocean of cheap, one or two-storey, immediate postwar, jerry-built stores and shops with no redeeming virtue whatsoever, and crying out for high-rise redevelopment.

That redevelopment alone would be enough to put a cap on Tokyo’s rising CBD land prices.

The same was true for many other areas in central Tokyo like the Ichigaya area where I was living, for example.

But Japan had little interest in that kind of wisdom in those hectic days. 

It had convinced itself there was no more land left for productive redevelopment, and that was that.

And when a developer did manage to harangue the elderly owners of one of those decrepit Kanda buildings to move out and provide room for redevelopment, he would then be denounced by the media as a cold-hearted, semi-gangster jiageya (land scrounger) with no feeling for the plight of these gentle people seeking only to maintain their traditional, slum-like lifestyle.

The fact that those ‘gentle people’ (who would receive fortunes if they sold their land) were in effect blocking the high-rise development needed to provide accommodation was ignored.  

But the media, never unwilling to pull at any heart strings available, would then make much of the plight of young Japanese unable to find accommodation. 

It was Japan’s emotional illogicality at its worst.

Surplus Country Land

A drive to my Boso property took me through miles of untouched forest or hill land just beyond the outer Chiba suburbs and only an hour by car or train from central Tokyo.

And as farming turned to the more profitable rice-growing, large areas of vegetable and fruit-growing land (hatake) were being abandoned and would have been available for housing but for crazy government restrictions that said Japan’s agricultural future depended on preventing the sale of hatake to outsiders.   

I would tell my lecture circuit audiences that Japan’s rural land surplus was a major reason I had come from allegedly land-rich Australia to allegedly land-poor Japan, and wanted to stay.

It was only in Japan that I could find rural land cheap enough for me to have the hobby farm I wanted.  And I was not exaggerating.

In Australia it would have been impossible for me to have anything like my two acre Boso farm only an hour or so from the CBD of a major city. Hobby farms, even two-three hours from Sydney, were hard to find, and very expensive to buy.

But few wanted to believe me. The tochi shinwa was too deeply embedded.

To create more land for Little Japan, expensive plans to fill in much of Tokyo Bay were being pushed. Some even proposed floating pontoons off the coastline as possible sites for factories etc.

The height of this absurdity was a MITI boondoggle to start building three storey residential edifices underground. It was only abandoned when the prototype began to leak badly.

8. The Shiodome Fiasco

The refusal to develop a district called Shiodome shook me badly.

Here were 31 hectares of abandoned railway yards less than one kilometer from the crowded Tokyo central district, with good ocean views and transport links, ideal for high-rise development.

Put up for the sale in any normal society it would have killed CBD land speculation fever in its tracks.

But the government refused to sell the land.

It said that by putting the land up for sale it would further inflame speculative fever. CDB prices would rise even higher.

So there we had it – a brilliant new Japanese contribution to economic theory.

In the West you might hope to lower land prices by increasing land supply.

But in Japan prices increased when you increased supply.

Years later Shiodome development did begin, but by then it was too late to stop the insanity.

Yet given the irrational herd behavior of Japanese speculators there could even have been some perverse logic in the official thinking – that a fevered rush to join Shiodome development would have inspired more fevered rushes elsewhere.

9. Mythical Assets (Fukumi Shisan)

Bolstering the Bubble even further was the concept of ‘fukumi shisan’ (concealed assets).

It said that if the land owned by a company was originally worth 100, we could assume that the value today was much higher and therefore its share price should jump accordingly.

The company had a concealed (unbooked) asset worth many times 100.

The fact that the value of a company’s land would only be relevant if it was having to sell the land – something that probably would only happen if Japan’s economy was in slump and the inflated land values therefore no longer existed – was ignored by the speculators.

Fukumi shisan’ became the favourite excuse for ramping the share prices of even conservative steel and shipbuilding companies.

Why? Because they held large areas of land for their operations.

PERs of over 100 were common, with dividend yields often a mere 0.1 percent, when interest rates were around six-seven percent.

Realising that the value of those polluted, badly located blocks of land would be close to zero if economic conditions were so bad that they had to be thrown onto the market, that too was never allowed to bother the minds of boom-addled speculators. 

This disconnect between returns and interest rates covered the full range of property investments.

To the Western mind, if land developed to the best of its potential could only offer a return of around two percent relative to bubble land prices, and interest rates remained high at around six percent, then eventually something would have to crack.

And provided the bubble continued, that something would not be the collapse of interest rates. It would have to be the sound of property developers going bankrupt.

But that logic also was never allowed to intrude into the minds of Japan’s mad speculators.

10. Resort Boom

Yet another Bubble factor was the resort development boom

It happened like this, and I was partly involved.

As Japan cast around for ways to expand domestic demand, some of us with media access began to point out the weakness of Japan’s leisure industry, resort development especially.

My Boso experience had me wondering why others were not interested in using Japan’s empty hill areas for resort development.

Or oceans. Japan was a large maritime nation but had less yacht harbours than Denmark.

One result was the resort development law of 1987. The government would provide incentives for the regions to set aside land and funds for new resorts.

That in turn was to encourage even more land speculation and the building of expensive resorts – hot spring hotels, golf courses, theme parks, play parks.  

Many were destined to go bankrupt as soon as the Bubble collapsed.

Some of the waste was inevitable. Planning was bad. Organising large resort developments was not a Japanese skill, it seemed. 

And corrupt gangsters, politicians and bankers were also often involved.

But some problems were less predictable. Even worthwhile projects were to fail.

Both the investors and the commentators (including myself) failed to realise just how weak was the demand in Japan for Western-style leisure.

For a while there was a boom in theme developments – German Land, French House, Spanish Park and so on. But the only survivor seems to be Disneyland with its very experienced US management. 

Just two hours from Tokyo was the Kujukuri beach area – a vast stretch of broad, southward facing clean sand beach (‘kujukuri’ means 99 li, with each li close to a kilometer).

Anywhere else in the Western world it would have seen Gold Coast-style development equal to that near my home town of Brisbane.

Or more. Brisbane only had a population of around one million. Tokyo and its surrounds had a population close to 30 million.

Yet apart from one or two high-rise resort condos – relics of the Tanaka Kakuei land boom of the early seventies – Kujukuri was virtually deserted.  It stayed that way even after they built a high-speed highway giving access of just one hour to Tokyo CBD.

Meanwhile Brisbane’s Gold Coast was lined with dozens of high-rise condos enjoying good all year round occupancy. Roads to the coast from Brisbane were already clogged by mid-Friday afternoon.

On a Friday evening the roads leaving Tokyo for Kujukuri are largely empty. The few resort condos have only one or two windows lighted.

I for one did not realise just how strongly Japanese values worked against the kind of leisure spending we take for granted in the West.

Few seemed to feel the need for leisure. Work, relations with friends and family, clubs etc were all more important.

True, the Kujukuri area, like the rest of Chiba, had an image problem.  Resort investment in the fashionable Izu area three hours from Tokyo was much higher.

But to the Western mind a beach is a beach, where-ever it may be. The lack of interest in Chiba beaches was a mystery for me.

11. Yutori  to the rescue?

Together with the resort law came a curious campaign calling for so-called ‘yutori seikatsu,’ or a more relaxed lifestyle.

The government had decided that one of the reasons for trade frictions and worldwide anti-Japanese feeling generally was that the Japanese people were working too hard.

The early seventies had seen a major fuss over former Pakistan prime minister, Bhutto, describing the Japanese as ‘economic animals.’

Few wanted to realise the background to the remark, namely that Bhutto was simply implying that the Japanese with their greater interest in economic recovery rather than global politics were not interested in attending the very political non-aligned nations’ conference he was organising.

So he decided they were economic animals, not political animals.

Nor did they realise what anyone who knew English properly would realise, namely that ‘animal’ in this context had no more bestial connotation than the often used statement that ‘man’ is a social animal – that all men (people) react to the societies in which they live.

But Japan was determined to believe that the world regarded it as less than human because of its obsession with economic progress. 

A return to more spiritual and human values was urged.

A similar fuss was to be caused by an EC report describing the Japanese as work-alcoholics living in rabbit hutches.

One result of the ‘yutori seikatsu’ campaign (the government even used to run ads urging the change in lifestyle) was the move to legitimise the two-day weekend.

This, I told myself, should see the beginning of a real resort boom.

But I was wrong again.  The boom never came. 

And when something like Club Med with its superior management did arrive, it did little to increase leisure-seeking of the kind we know in the West –  5-6 week vacations on some beach or mountain resort.

For a while I was marginally involved in a very sincere effort to create a German Village in the forests of Hokkaido, complete with genuine fraulein and a Saxony castle imported and rebuilt, stone by stone.

But from the beginning I could see it would fail. To attract Japanese customers it was too remote even though it lay by the road leading to Obihiro airport.

And it lacked the pizzazz of a Disney resort.

And fail it did, despite the enormous effort and expense in its creation. 

I was once pulled into a roundtable on  NHK – the national radio/TV  channel – to discuss the need for more ‘yutori’. I was happy to agree.  

But I had noted how preparing for our program had required an army of NHK staff working overtime to produce a mountain of documentation, most of which was unused in the program.

I caused a minor sensation when I noted this on camera.

Not much ‘yutori’ there, I joked.  I even managed to get an embarrassed laugh out of the usually staid NHK organization.

Gangsters, Again

The resort law may have left most Japanese unexcited. But it did do much to encourage Japan’s hyena-gangsters, who soon realised the chance to get money for nothing.

All they had to do was float some scheme for golf course, hot spring or hotel development and insist it was consistent with Tokyo’s call for more resort development.

On that basis and with minimum or zero collateral they could easily persuade the more corrupt or stupid of Japan’s bankers to lend the money for their development.

After all, were they not all cooperating with the national goal of expanding resorts?

If and when things went wrong they could simply renege on the debt.

Banks had seen their loan staff suffer various forms of death threats, some real, when they tried to foreclose on gangster debt. They realised that it was best not to bother.

Eventually the government under its loan loss insurance schemes would have to pick up the tab for their bad loans anyway.

The Japanese banking system had become a conveyor belt pushing the large funds accumulated by Japan’s inveterate, lemming-like savers into the hands of Japan’s large and hungry gangster community.

The bankers who loaned the money would get brownie points for meeting lending quotas, allowing them to retire with large bonuses eventually.

The politicians would reinforce their ties with the gangsters by acting as intermediaries with the bankers.

Everyone was happy. And this was the nation someone once called Japan As Number One.

12. Bubble Finale

Eventually the party had to end. 

By the early nineties even the speculators were beginning to realise they had gone too far.

If Japan had had any sense the party could have ended a lot earlier. All it needed was for the Bank of Japan to jack up interest rates.

But the increase in rates kept on being delayed, partly for fear of what would happen. And when the increase finally came it finally happened.

On a cold February afternoon in 1990 the stock-market made its first major collapse.

I remember it well. I was listening constantly to the radio stock-market report while driving long-distance that day.

Share after share was down, at first ten percent, then an hour later by twenty, then thirty, but still no buyers.

The day before everyone was buying happily. Today no one had any interest in buying.

By the time I reached my destination there were even some falls of as much as fifty percent. Few moments of truth could have been as spectacular.

Bubble Japan must have realised it was playing with fire, and that something needed to be done before it was too late.

But as we see so often in Japan (the latest is the failure from the beginning to realise, and then do something, about the catastrophic population decline) action is constantly delayed, until it is too late.

In a Toyo Keizai magazine article I had used the analogy of the person paralysed by fear when facing a cobra. With Bubble collapse the cobra had struck.