Everything You Need to Know About the Japanese Real Estate Collapse
We’ve covered China’s market crash comprehensively, especially record-breaking trophy real estate acquisitions. The recent Chinese invasion—investors made $8.5B in direct acquisitions of US commercial real estate—brought memories of another Asian buying spree that didn't end well.
Altogether, Japanese investors squandered as much as $50B worth of US real estate. Will China make the same mistake? Here's everything you need to know about that Asian real estate bubble:
Back in the '80s, after the US and Japan agreed to revalue their currency, Japan’s GDP grew 3.89% annually, and Japanese investors were snapping up US real estate. With an appreciated yen, growing trade surpluses and a peaking Nikkei 225 Index, Japan’s economic dominance raised fears of a corporate takeover.
What Caused the Japanese Rise?
At first, Japanese involvement in the US wasn't that noticeable. Sure, their companies were buying American tech, but it seemed normal for a recovering economy. The Japanese worked around a lack of natural resources by improving Western products and selling them cheaper, and created more efficient manufacturing methods.
But, when a Japanese conglomerate purchased a Ford-owned steel company, eyebrows raised. Things got tenser in the mid-1980s, when the dollar's value exploded and a major trade gap ensued. In 1985, the G-5 countries signed the Plaza Accord, allowing more liberal trade policies that would close the gap and let the dollar fall dramatically in comparison to the yen (shown). With the stronger yen, excess liquidity in the banking system and financial deregulation, Japanese investors went buying.
What did they buy?
Overconfidence in the Bank of Japan’s loose monetary policy led to aggressive speculation, raising prices in Tokyo’s prime neighborhoods to Manhattan-levels. So—in addition to taking over tire companies (Bridgestone bought Firestone for $2.6B) and media powerhouses (Sony bought CBS Records and Columbia Pictures)—conglomerates looked to US real estate. Japanese purchases included the Mobil Building, the Hyatt Regency Hotel in Chicago, the Pebble Beach Golf Course, the 92-room Hotel Bel Air, and the 707-room, $219M Biltmore Hotel in Los Angeles (shown).
In November 1989, Mitsubishi shocked the world when it bought an 80% stake in Rockefeller Center for $1.4B. Real estate investments reached a peak in 1988, with over $16.7B flooding into US properties. Many of these were bought with shaky real estate loans.
How Did the World React?
With such massive purchases (around $78B since the early 1980s) and consistent growth, many—including the Japanese—didn't know how to react. Some believed Japan’s Ministry of International Trade and Industry had near-supernatural prowess, while others believed the US had to step in. Some economic columnists warned of “economic Pearl Harbor”; others insisted Japan still didn’t compare to US output. And, of course, Hollywood caught on to American fears. From Die Hard (shown: the Fox Plaza, the “Nakatomi Building” in Die Hard) to Back to the Future 2 to Robocop 3, Japanese business men were everywhere.
Why Did the Bubbles Burst?
Japanese inflation skyrocketed. The Bank of Japan's (shown) new president, Yasushi Mieno, was forced to raise rates when he took office in December 1989. The shock tanked the Tokyo economy the following year (39,000 to 20,000, hitting 15,000 by 1992), but Mieno continued to raise discount lending rates, reaching as high as 3.25%. Even before this, banks had been using trillions of yen to take increasingly risky investments and leveraged buyouts, including 40% of the buyout of RJR Nabisco, which ended in the US' biggest corporate scandal.
What Happened After the Crash?
As the US economy continued to roar, the Japanese became “the sick man” of the world economy. Losing millions on property, they soon had to sell back prized properties. In only five years, $40B to $50B of Japanese-owned US properties returned to Western owners. Mitsubishi, for example, had lost $600M on Rockefeller Center (shown) and had to put the property in bankruptcy protection.
In addition, the Japanese soon had more than $400B in problem real estate loans, and land values dropped 70% by 2001. Now available at a discount (the Japanese would only make 65 cents on the dollar), properties could be picked up by retirees, government employees and even auto assembly line workers using pension plans. 1991 to 2003 was Japan’s “Lost Decade,” with 1.14% annual growth, and the country still hasn't reached its previous dominance.
What Can We Learn?
Japan could’ve been a teaching tool for the Chinese, especially since both countries had steep GDP rises (China's shown) and unique economic cultures, but were sunk by bubbles that neither country would admit they had. But, while the Japanese invested in older properties with shaky loans, the Chinese have invested in both old and new properties, mainly with more stable cash and capital. So while the Japanese investment in US properties was most likely doomed to fail, there’s more hope for Chinese investments.