The was an economic bubble in Japan from 1986 to 1991 in which real estate and stock market prices were greatly inflated. In early 1992, this price bubble burst and the country's economy stagnated. The bubble was characterized by rapid acceleration of asset prices and overheated economic activity, as well as an uncontrolled money supply and credit expansion.Kunio Okina, Masaaki Shirakawa, and Shigenori Shiratsuka (February 2001):The Asset Price Bubble and Monetary Policy: Japan's Experience in the Late 1980s and the Lessons More specifically, over-confidence and speculation regarding asset and stock prices were associated with financial policy deemed to exacerbate them.Edgardo Demaestri, Pietro Masci (2003): Financial Crises in Japan and Latin America, Inter-American Development Bank Through the creation of economic policies that cultivated the marketability of assets, eased the access to credit, and encouraged speculation, the Japanese government started a prolonged and exacerbated Japanese asset price bubble.

By August 1990, the Nikkei stock index had plummeted to half its peak by the time of the fifth monetary tightening by the Bank of Japan (BOJ). By late 1991, other asset prices began to fall. Even though asset prices had visibly collapsed by early 1992, the economy's decline continued for more than a decade. This decline resulted in a huge accumulation of non-performing asset loans (NPL), causing difficulties for many financial institutions. The bursting of the Japanese asset price bubble contributed to what many call the Lost Decade. Japan's average nationwide land prices finally began to increase year-over-year in 2018, with a 0.1% rise over 2017 price levels.

Background Early research found that the rapid increase in Japanese asset prices was largely due to the delayed action by the BOJ to address the issue. At the end of August 1987, the BOJ signaled the possibility of tightening monetary policy but decided to delay the decision in view of economic uncertainty related to Black Monday of 1987 in the United States.Research and Statistics Department, Bank of Japan, April 1987b, Jousei Handan Shiryo: 62-nen Haru (Quarterly Economic Outlook: Spring 1987)," Chousa Geppo (Monthly Bulletin)(in Japanese)

Later research argued an alternative view: that the BOJ's reluctance to tighten monetary policy was in spite of the fact that the economy went into expansion in the second half of 1987. The Japanese economy had just recovered from the , which occurred from 1985 to 1986. The endaka recession has been closely linked to the Plaza Accord of September 1985, which led to the strong appreciation of the Japanese yen.Mieno, Yasushi, (2000) Ri wo Mite Gi wo Omou (Recall Faith to See What Makes a Profit), Chuo Koronsha,(in Japanese) The term endaka fukyō would in the future be used repeatedly to describe the many times the yen surged and the economy went into recession, posing a conundrum for business and government, trade partners, and anti-monetary interventionists. Economist Richard Werner says that external pressuressuch as the Plaza Accord and the policy of the Ministry of Finance to reduce the official discount rateare insufficient to explain the actions taken by the Bank of Japan that led to the bubble.

The strong appreciation of the yen eroded the Japanese economy, which was led by exports and capital investment for export purposes. In fact, in order to overcome the endaka recession and stimulate the local economy, an aggressive fiscal policy was adopted, mainly through the expansion of public investment. Simultaneously, the BOJ declared that curbing the yen's appreciation was a national priority.Ohta, Takeshi (1991)Kokusai Kin'yu—Genba Kara no Shougen (International Finance—Witness Concerned), Chuko Shinsho (in Japanese) To prevent the yen from appreciating further, monetary policymakers pursued aggressive monetary easing and slashed the official discount rate to as low as 2.5% by February 1987.

The move initially failed to curb further appreciation of the yen, which rose from 200.05 ¥/U$ (first round of monetary easing) to 128.25 ¥/U$ (end of 1987). The course only reversed by the spring of 1988, when the US dollar began to strengthen against the yen. Some researchers have pointed out that "with [the] exception of the first discount rate cut, the subsequent four are heavily influenced by the US: [the] second and the third cut was a joint announcement to cut the discount rate while the fourth and fifth was due to [a] joint statement [of] either Japan-US or the G-7". At this point, the US urged the other countries to raise interest rates, fearing the effects of further depreciation of the dollar on the budget and current account deficit. Almost all discount rate cuts announced by the BOJ explicitly expressed the need to stabilize the foreign exchange rate, rather than to stabilize the domestic economy.

Later, BOJ hinted at the possibility of tightening the policy due to inflationary pressures within the domestic economy. Despite leaving the official discount rate unchanged during the summer of 1987, the BOJ expressed concern over excessive monetary easing, particularly after the money supply and asset prices rose sharply. Nonetheless, Black Monday in the US triggered a delay for the BOJ to switch to a monetary tightening policy. The BOJ officially increased the discount rate on March 31, 1989.

The table below demonstrates the monthly average of the U.S. dollar/Yen spot rate (Yen per USD) at 17:00 JST.Bank of Japan: US.Dollar/Yen Spot Rate at 17:00 in JST, Average in the Month, Tokyo Market for duration January 1980 ~ September 2010. Retrieved February 24, 2013

Year MonthJan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 1985 254.11 260.34 258.43 251.67 251.57 248.95 241.70 237.20 236.91 214.84 203.85 202.75 1986 200.05 184.62 178.83 175.56 166.89 167.82 158.65 154.11 154.78 156.04 162.72 162.13 1987 154.48 153.49 151.56 142.96 140.47 144.52 150.20 147.57 143.03 143.48 135.25 128.25 1988 127.44 129.26 127.23 124.88 124.74 127.20 133.10 133.63 134.45 128.85 123.16 123.63 1989 127.24 127.77 130.35 132.01 138.40 143.92 140.63 141.20 145.06 141.99 143.55 143.62 1990 145.09 145.54 153.19 158.50 153.52 153.78 149.23 147.46 , 138.96 129.73 129.01 133.72 Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Month

#Remarks Plaza Accord on September 22, 1985 First round monetary easing (January 30, 1986): Official discount rate cut from 5.0% to 4.5% Second round monetary easing (March 10, 1986): Official discount rate cut from 4.5% to 4.0% simultaneously with FRB and Bundesbank Third round monetary easing (April 21, 1986): Official discount rate cut from 4.0% to 3.5% simultaneously with FRB Fourth round monetary easing (November 1, 1986): Official discount rate cut from 3.5% to 3.0% Fifth round monetary easing (February 23, 1987): Official discount rate cut from 3.0% to 2.5% in accordance to Louvre Accord (February 22, 1987) BOJ signalling possible monetary tightening Black Monday (NYSE crash) on October 19, 1987 Consumption tax introduced First round monetary tightening (May 30, 1989): Official discount rate hike from 2.5% to 3.25% Second round monetary tightening (October 11, 1989): Official discount rate hike from 3.25% to 3.75% Third round monetary tightening (December 25, 1989): Official discount rate hike from 3.75% to 4.25% Fourth round monetary tightening (March 20, 1990): Official discount rate hike from 4.25% to 5.25% Fifth round monetary tightening (August 30, 1990): Official discount rate from 5.25% to 6.00% due to Gulf Crisis Stock price tumbled to half the level of the peak

Timeline

1985 Plaza Accord ratified in September. Japanese yen strengthened from 236.91JPY/USD (September) to 202.75JPY/USD (December). "endaka recession" worsened in fourth quarter. Nikkei 225 moved above 13,000 by December 12, 1985.Yahoo Finance UK: Nikkei 225 Historical prices, Nikkei 225 stocks. Retrieved February 24, 2013 Sharp spike in land prices within Tokyo metropolis; average land prices (per 1sq. metre) in commercial districts in Tokyo jumped close to 42% compared to the previous years.Land Economy and Construction and Engineering Industry Bureau, Ministry of Land, Infrastructure, Transport and Tourism (2004) Survey on average prices of housing land by use and prefecture 1986 In addressing the appreciation of the Japanese yen, the BOJ began to ease the monetary policy, cutting the official discount rate from 5.0% to 3.0%. Japanese yen touched a new high against the US dollar (154.11JPY/USD) in August before settling down at 162.13¥/U$ in December. Nikkei 225 strengthened further from 13,024 (January 6, 1986) to 18,821 (December 26, 1986). Average land prices (per 1sq. metre) in Tokyo residential areas recorded an increase of 45% (compared to 1985), while average land prices (per 1sq. metre) in Tokyo commercial districts jumped approximately 122% (compared to 1985). Land prices in Tokyo industrial sites jumped about 14% (per 1sq. metre). Commercial land prices (per 1sq. metre) in Osaka rose 35% compared to the previous year.

1987 Japan's economy recovered, and entered into a year of expansion by the first quarter. In accordance with the Louvre Accord, BOJ cut the official discount rate from 3.0% to 2.5%. BOJ expressed concern over the asset inflation and signaled the possibility of a monetary tightening policy in the summer of 1987. Japanese yen continued to be strengthened against US dollar, touching a new high of 128.25JPY/USD by December. Nikkei 225 broke the 20,000 level mark by January 30, 1987, and recorded a new high of 26,118 on September 1, 1987. Nikkei 225 slipped back to 21,564 by December 28, 1987, due to economic uncertainties after the Black Monday of NYSE. As land supply within Tokyo metropolis was scarce, investors began to speculate on land around the Greater Tokyo Area, notably Southern Kanto urban land concentrating in Kanagawa (in Yokohama), Saitama and Chiba prefecture. Urban land in Osaka, Kyoto, Aichi (in Nagoya) and Hyogo (in Kobe) prefecture experienced unusual growth in asset inflation. 1988 Japanese yen strengthened to 123.16JPY/USD by November before weakening slightly to 123.63JPY/USD in December. Nikkei 225 broke the 30,000 level mark and recorded a new high of 30,159 on December 28, 1988. Asset price growth in Tokyo metropolis began to stagnate, especially in residential areas and commercial districts. Lands in certain wards in Tokyo metropolis began to drop. Other urban lands in the Greater Tokyo area remained in an upward trend. Urban land in Osaka, Kyoto, Aichi (in Nagoya) and Hyogo (in Kobe) prefectures was largely unaffected by the situation of the Tokyo counterparts. 1989 Consumption tax was introduced in Japan in April 1989. BOJ tightened monetary policy by hiking the official discount rate from 2.5% to 4.25% by late December 1989. Japanese Yen fell against US dollar, falling as low as 145.06JPY/USD by September. Nikkei 225 touched a then-historical all-time high of 38,957.44 on December 29, 1989. Land prices crashed in Tokyo metropolis as residential land on average 1 sq. metre declined by 4.2%, while land prices in commercial districts and industrial sites in Tokyo metropolis remained stagnant. Adjacent prefectures, especially Kanagawa prefecture, also began to be affected due to their geographical proximity to Tokyo metropolis. In Yokohama (Kanagawa), land prices in residential areas were either stagnant or dropped slightly compared to 1988. All other major urban lands in Japan remained unaffected by the asset collapse over Tokyo. 1990 BOJ continued to tighten monetary policy by pushing the official discount rate from 4.25% to 6.00%. Japanese yen weakened to as low as 158.50JPY/USD by April but began to strengthen in the second half of 1990; it touched as high as 129.01JPY/USD by November. Nikkei 225 dropped sharply from 37,189 (January 4, 1990) to 23,849 (December 28, 1990), losing over 35% in value in 1990.