Did 1980s Japanese Investors Know They Were in a Real Estate Bubble?

The Bank of International Settlements has a neat paper out looking at the question of whether Japanese real estate investors knew they were in a bubble in the 1980s. Some might say, How could they not have known? After all, prices soared in the period, with tiny plot of land in Tokyo becoming worth tens of millions of dollars.

Well, some are fond of arguing that bubbles are only known in retrospect, that participants did not know they were in a bubble. To that way of thinking, it is only our after-the-fact wisdom that makes us think we would have known at the time.

So, who is right? To a make a long and analytical paper somewhat shorter, the authors of the BiS paper argue that commercial market participants in Japan knew that they were in a bubble, and they tried to play it like a fiddle:

To the extent that shareholders of manufacturing firms were a diverse group of market participants, our results imply that investors did appreciate, at least to some extent, the riskiness of land prior to the asset market collapse. This calls into question claims made during the 1990s that it was impossible to know that land was risky.


  1. Most participants in market systems are oblivious to the various mechanisms at play: supply, demand, cost-of-capital/interest rates,historical prices etc…they just know “prices are up” or “prices are down”. Hence valuations typically oscillating wildly as the clue train roles into town for various players.