Land and Stock Prices in Japan

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Abstract
This paper discusses the rise of Japanese stock and land prices in the past four decades and their dramatic decline in the early 1990s. To what extent can fundamental factors explain both the price levels and the returns from land and stock in Japan? Are land prices driving stock prices, or the other way around, or are still other factors affecting both? How has government policy interacted with the price changes? In practice, it is very difficult to solve the problem of separating the explanation that a bubble occurred from the possibility that the underlying fundamental problem is misspecified. We believe that the bulk of the rise in Japanese asset prices from 1985–89 and the decline during 1990–92 was driven by interest rate and credit market conditions. However, in certain speculative land markets, there is some evidence in support of the bubble hypothesis.

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