Between 1989 and 1991, Japanese society was struck with fear as housing prices surged rapidly, forming a “real estate bubble.” The call for “actively bursting the bubble” gained the upper hand. In 1991, the Bank of Japan raised interest rates consecutively, triggering the collapse of the real estate market. After the bubble burst, the Japanese government implemented counter-policies, such as increasing tax burdens and accelerating property foreclosures, which exacerbated negative public sentiment and formed a vicious cycle. From 1991 onwards, the Japanese real estate market remained sluggish for around 22 years, with Tokyo’s housing prices at one point falling to less than half of the historical peak. Japanese manufacturing also fell into trouble due to decreased demand, and the stock market remained at a long-term low, plunging the Japanese economy into what became known as the “Lost 20 Years.”
Starting in 2013, Japanese housing prices gradually recovered from the slump. The catalyst for this change was the financial easing policies of “Abenomics” and the construction demands brought by Tokyo’s successful bid for the Olympics. By 2025, Japanese housing prices had risen for 12 consecutive years, driving the Nikkei index to new heights and restoring young people’s confidence in economic development.
Studying Japan’s experience offers valuable insights for current real estate market policy-making and public opinion guidance.
I. Background of Public Consensus and Policy Shift
After the signing of the “Plaza Accord” in 1985, Japanese companies used the sharply appreciated yen to acquire real estate in the United States, causing domestic housing prices to surge, rapidly inflating the bubble. Japan’s real estate market entered an unprecedented frenzy, creating a massive asset bubble. Newspapers and magazines were filled with nationalistic reports like “Japan First” and “Buying Up America,” further reinforcing the public’s overconfidence in economic strength. Banks even accepted land as the sole collateral, lending without limits. In 1989, Mitsubishi Estate’s purchase of the Rockefeller Center in New York was portrayed by Western media as a symbol of the “Japan Threat,” while in Japan, it was hailed as a sign of the nation’s rise. This public sentiment marginalized any voices questioning the risk of the bubble, leading to a collective societal blind trust in real estate speculation.
In 1990, the U.S. entered a cyclical real estate recession, and housing prices plummeted. Japanese companies that had purchased real estate in the U.S. suffered losses of over 50%, while domestic land and housing prices also fell. This triggered a wave of condemnation of the “real estate bubble” within Japanese society. In this rapid shift of public consensus, the media played a role in fueling the rhetoric. Real estate was described as a “cancerous organization that devours the real economy.” Major newspapers like Asahi Shimbun led the criticism, claiming real estate “drained the lifeblood of manufacturing” and blaming “industrial hollowing out” on real estate. Social activists even launched an “anti-real estate movement,” calling property speculators “traitors to the nation” and demanding the government impose “punitive heavy taxes” on owners of vacant properties. Japanese media also propagated the idea that “after the collapse of real estate, the funds will flow into manufacturing, which is a good thing.” In 1992, Yomiuri Shimbun’s editorial proposed the famous “Whale Fall Theory,” claiming that “the real estate bubble is like a whale in critical condition; its sinking will nourish the sea of industry,” coining the phrase “One whale falls, everything grows.” In reality, this was far from true. After the slump in real estate, the so-called “everything grows” never materialized, and Japanese manufacturing investment shrank by 28%, while innovation and research stagnated for 10 years.
The media jointly pushed for a strong public consensus demanding the government “actively burst the real estate bubble.” This consensus mainly stemmed from two key realizations: first, mainstream Japanese economists widely believed that asset prices had significantly deviated from economic fundamentals, with the theoretical value of the Imperial Palace grounds in Tokyo once exceeding the entire state of California, raising widespread concerns over such absurd valuations. Second, public sentiment generally believed that the bubble economy had exacerbated social inequality, excluding young families from the housing market and escalating generational conflicts.
Faced with the powerful public demand to “burst the bubble,” there were significant divisions within the Japanese government on how to respond. The conservative faction, represented by the Ministry of Finance, advocated for an immediate tightening policy to prevent the bubble from expanding further. On the other hand, the Ministry of International Trade and Industry and other departments were concerned that an aggressive policy might lead to an economic hard landing. Ultimately, under pressure from public opinion, the “actively bursting the bubble” faction prevailed. The theoretical basis for this decision was that a gradual tightening would allow the bubble to deflate slowly, making the impact more controllable than a natural collapse. However, later events proved that this judgment severely underestimated the complexity of the bubble economy and the fragility of the financial system.
II. Policy Operations and Market Reactions of “Actively Bursting the Bubble”
In May 1989, under domestic and international public opinion pressure, the Bank of Japan initiated the famous “bubble deflation” operation. This series of policy adjustments proved to be the last straw that broke the Japanese real estate market. Policymakers at the time completely ignored the fact that the economy had become deeply dependent on the low-interest-rate environment and underestimated the chain reactions that credit tightening could trigger. The Bank of Japan adopted a dual tightening strategy: on one hand, it raised the discount rate five times between May 1989 and August 1990, from 2.5% to 6.0%, far exceeding market expectations; on the other hand, in March 1990, it introduced the “real estate financing volume regulation,” directly limiting bank lending to the real estate sector and cutting off developers’ cash flow.
After these policies were implemented, the market’s response was swift and disastrous. The Nikkei 225 index plummeted first, falling nearly 50% from its historic high of 38,915 points in late 1989 to below 20,000 points by October 1990 in just 10 months. The stock market collapse quickly spread to the real estate market, with commercial land prices in the Tokyo metropolitan area experiencing a cliff-like drop of 15% in 1991, completely reversing the 36-year upward trend. More critically, credit tightening caused developers’ cash flows to break down, and many ongoing projects were abandoned, creating a unique phenomenon of “half-finished projects” scattered across urban landscapes.
The Bank of Japan’s decision to tighten at this time was a serious mistake in terms of timing. After the global stock market crash in 1987, Japan postponed raising interest rates at the request of the U.S. to stabilize international financial markets, missing the best window for policy adjustment. By 1989, the bubble had permeated all corners of the economy, and aggressive tightening at this point was akin to performing “shock therapy” on a critically ill patient, which could prove fatal. Members of the Bank of Japan’s policy committee later admitted in their memoirs, “We overestimated the economy’s capacity to endure and underestimated the self-reinforcing effect of falling asset prices.”
There were also serious issues at the technical level of policy operations. The Bank of Japan was overly aggressive in its interest rate hikes, raising rates by 350 basis points in just 18 months without providing sufficient transition time for commercial banks. At the same time, the simultaneous implementation of monetary policy and macroprudential policies led to a policy overlay effect far beyond expectations. Due to the tradition of “window guidance,” Japan’s banking system was highly sensitive to central bank directives, and once the policy shifted, banks began to fully tighten real estate lending, even significantly raising credit standards for prime clients.
After the real estate market bubble burst in 1991, the Japanese government’s crisis response only made matters worse. When the market most needed liquidity support, the Ministry of Finance introduced two tax policies in 1992 that further burdened the market: a land tax (0.3% holding tax) and a special land ownership tax, while also raising the short-term capital gains tax rate to 10%. These measures were intended to curb speculation, but their implementation during a market freefall directly led to a sharp increase in holding costs, forcing more investors to panic-sell. Research by Professor Yoshikawa Hiroshi of the University of Tokyo pointed out that the new tax policies in 1992 amounted to fiscal tightening during an economic recession, which was completely contrary to Keynesian principles of economic crisis response.
III. The Japanese Government’s Reverse Actions in Crisis Response
After the real estate market collapse, the Japanese government not only failed to adjust its policies in a timely manner, but also implemented a series of reverse actions that contradicted the logic of market recovery, thereby exacerbating the crisis. These policy failures mainly occurred in three key areas: tax policies, property foreclosure disposal, and financial assistance, which together created a self-reinforcing vicious cycle.
- The Fatal Decision to Increase Tax Burdens
In 1992, when the Japanese real estate market had clearly entered a downward phase, the Ministry of Finance insisted on introducing two tax policies that further burdened the market: a land tax (an additional 0.3% fixed asset tax) and a special land ownership tax, while also raising the short-term capital gains tax rate to 10%. The theoretical basis behind this decision was to curb land speculation, but implementing it during a market freefall had the opposite effect. The land tax significantly increased the cost of holding land, forcing many corporate and individual investors to sell off assets to avoid continuing losses. Notably, Japan’s tax system did not allow real estate losses to be offset against other income, which further exacerbated the selling pressure.
The flaws in the tax policy design also manifested in the lack of regional differentiation. Policymakers failed to account for the market differences between bubble-stricken areas like Tokyo and Osaka, and smaller regional cities, imposing a one-size-fits-all tax rate nationwide. As a result, between 1992 and 2000, residential land prices in the six major cities fell by 65%, while prices in smaller cities only dropped by 19%. This regional imbalance made the recovery in the hardest-hit areas even more difficult, creating a vicious cycle of localized economic decline.
- The Rise of Foreclosed Properties and the Collapse of Price Expectations
Japan’s financial institutions inadvertently caused a “foreclosed property” crisis after the bubble burst. According to Japan’s Civil Execution Law, banks could dispose of defaulted mortgaged properties through a simplified procedure. Between 1991 and 1995, as corporate bankruptcy rates soared and unemployment spread, the number of foreclosed properties across the country increased by 300%, with over 20,000 residential units entering the foreclosure process in Tokyo alone in 1993.
These foreclosed properties created a lethal “marginal pricing” mechanism. This distorted the price discovery function, as foreclosed properties were often sold at 30%-50% below market value, setting new price benchmarks for the region. This price trend was then transmitted to buyers’ expectations, with each low-priced sale reinforcing bearish market sentiment, causing buyers to hold off on purchases and leading to a “negative wealth effect.” The depreciation of property values worsened the balance sheets of businesses and individuals, further suppressing consumer demand.
Japan’s judicial system was slow to react to this crisis. It wasn’t until 1998 that the Civil Execution Law was amended to introduce a “self-auction” system, allowing debtors to retain their properties after an unsuccessful auction. However, by this time, market confidence had already been completely destroyed.
- The Directional Bias in Financial Assistance
Japan’s financial assistance policies also exhibited a serious directional bias, with three main issues: first, the wrong targets for rescue, as banks were prioritized over real companies or households; second, the lack of risk-sharing mechanisms, as Japan required mortgage defaulters to bear full debt liability, in stark contrast to the U.S.’s “non-recourse loans”; and third, the delayed handling of bad debts, as banks’ non-performing loan rates were systematically underestimated from 1990 to 1996, reaching a peak of 8.4% in 2001 and declining to 2.4% by 2005, taking 15 years.
The Financial Revitalization Law, enacted in 1998, established a framework for the bankruptcy of financial institutions. However, in practice, it mainly followed a “convoy system” approach (ensuring no financial institution was left behind). A typical case of this approach occurred in 2003 with the injection of 2 trillion yen of public funds into Resona Bank to boost its capital adequacy ratio above 10%. However, the government did not require the bank to restructure its real estate loans on a large scale. This “protecting institutions but not the market” approach ensured the survival of the banking system, but at the cost of serious damage to the real economy.
IV. Delayed Market Rescue and the Vicious Cycle of Worsening Public Sentiment
The Japanese government’s most fatal mistake in responding to the real estate crisis was the severe delay in rescue measures. The time span between the bursting of the bubble in 1991 and the launch of the first round of systemic rescue measures in 1998 was as long as seven years. This delay stemmed not only from the rigidity of the decision-making process but also from the influence of public opinion, which formed a self-reinforcing vicious cycle in tandem with the sharp shifts in public sentiment.
- The Shift in Public Opinion and Policy Paralysis
After the bubble burst, public sentiment in Japan underwent a 180-degree turn, shifting from calls for “actively bursting the bubble” to collective condemnation of the government and banks. This dramatic change in public sentiment was driven by two main factors: on one hand, the media widely reported on scandals involving banks’ illegal lending practices and the collusion between politicians and real estate developers, fueling public anger; on the other hand, ordinary families suffered massive losses due to falling housing prices, while government rescue measures seemed to focus solely on financial institutions, provoking a strong sense of injustice.
During this period, public opinion in Japan was highly emotional, with widespread protests and accusations making it difficult for the government to respond effectively. By the time the Japanese government acknowledged the “aftereffects of the bubble economy” in the 1995 Economic White Paper, public dissatisfaction had reached its peak. In such a hostile public environment, any rescue policy for the real estate market faced intense political opposition: ordinary taxpayers opposed using public funds to rescue speculators; opposition parties used the real estate crisis as a tool to attack the ruling Liberal Democratic Party for its failure; residents in non-metropolitan areas opposed diverting limited financial resources to bubble-hit cities like Tokyo and Osaka; and when the Hashimoto Cabinet attempted to introduce a housing tax reduction policy in 1996, it faced strong public resistance and was forced to scale it back, with minimal effects.
- The Foreclosed Property Crisis and the Price Spiral
The “foreclosed property” crisis became a core variable in this period, weighing down the market. Between 1991 and 2000, residential land prices in Japan’s six major cities fell by a total of 55%, with the “marginal pricing” formed by foreclosed property transactions playing a decisive role. This pricing mechanism had a self-reinforcing characteristic:
- Banks’ Risk Aversion → Higher Loan Thresholds → First-time Buyers Are Squeezed Out of the Market
- Decreased Demand → Shrinking Normal Transactions → Foreclosed Properties Account for 40% of Total Transactions (1995)
- Foreclosed Properties Sold at Low Prices → Become New Price Benchmark → Banks Reassess Collateral Value
- Declining Collateral Value → Bank Capital Adequacy Ratios Decrease → Further Tightening of Credit (Back to Step 1)
This vicious cycle persisted until 2003, when it was partially broken. By then, the average land price in Tokyo’s 23 special wards had dropped to just 25% of its peak value, and millions of households had fallen into the “negative asset” group.
V. Turning Point: Abenomics’ “Three Arrows” Attempt to Break the Deadlock
Japan’s real estate policy truly shifted with the introduction of Abenomics’ “Three Arrows” in 2013, 22 years after the bubble burst. This round of policy adjustments learned from earlier mistakes and achieved breakthroughs in multiple areas:
- Monetary Policy Innovation: The scale of Quantitative and Qualitative Easing (QQE) was unprecedented. The Bank of Japan’s balance sheet expanded from 140 trillion yen in 2012 to 700 trillion yen in 2020, accounting for over 130% of GDP. A 2% inflation target was clearly set, and through the purchase of ETFs and other risk assets, the deflationary expectations were broken.
- Fiscal Policy Structural Adjustments: Housing subsidies were raised from 300,000 yen to 1 million yen, and the mortgage interest tax deduction was extended. From 2013 to 2019, new apartment sales in Japan grew by 37%.
- Targeted Structural Reforms: In 2015, the Special Measures Law for Urban Regeneration was revised to allow a 50% increase in floor space ratio in central Tokyo, stimulating urban renewal. At the same time, the “womenomics” policy boosted dual-income family incomes. The average income of such families in Tokyo rose from 7.4 million yen in 2008 to 10.19 million yen in 2021.
Although these policies eventually contributed to the stabilization and recovery of Japanese housing prices after 2013, the 20 lost years caused permanent losses. Residential land prices in the six major cities did not return to their 1991 peak until 2023, and Japan’s real GDP barely grew over the span of three decades.