Asset bubbles, monetary policy and bank lending in Japan: an empirical investigation

Asset prices rose rapidly in Japan during the latter half of the 1980s, and then declined as quickly in the early 1990s. Their behaviour is consistent with the existence of speculative 'bubbles' in these markets. This paper investigates the dynamic relationships among stock and land prices in Japan, output, and monetary and bank lending variables. The results of causality tests and variance decompositions are reported for two time periods, 1972-1985 and 1986-1991. The price bubbles affected each other in the first period, although the size of this impact is dependent on the choice of variables in the VARs. In the bubble period, there is strong evidence that the stock market bubble was determined by its own past and also influenced the land market bubble, accounting for a significant proportion of the variance of the land market bubble. However, neither output, the money supply nor the lending variables were significant in the causality tests or in explaining the variation of the two assset bubbles.