The Boom-Bust Cycle in Japanese Asset Prices

Alpanda, Sami (2007): The Boom-Bust Cycle in Japanese Asset Prices.

Abstract

The Japanese economy experienced a substantial increase and a subsequent crash in land and stock prices in the 1980s and 90s. I use a neoclassical growth model to determine how much of these asset price movements can be accounted for by the observed changes in fundamentals of the Japanese economy; in particular changes in productivity growth and government policy regarding land taxation. In the model, corporations issue land-collateralized debt to reduce their tax liabilities and the government follows a land-taxation policy that is countercyclical to land prices. These features substantially magnify the effect of small shocks by reducing the required return on land. With the model calibrated to Japanese data, I find that the observed changes in fundamentals cannot simultaneously account for the movements in asset prices and macroeconomic variables. In particular, with persistent changes in fundamentals, the observed asset prices can be justified, but at the cost of counter-predicting macroeconomic variables.

• Item Type: MPRA Paper
• Language: English
• Keywords: Japan, land prices, asset pricing, land taxation, general equilibrium
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C68 - Computable General Equilibrium Models; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O40 - General

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