1. Beginning：The Calm Before The Stome

 

Bubble is hard to be defined and found. As O'Hara, Maureen (2008) discussed in " The Review of Financial Studies", " a bubble can only be determined after it has occurred." In the 1980s, an epic financial bubble crisis occurred in Japan, trillions of yen evaporated overnight. Is all this a sudden change or an alarm that has already sounded long time ago?

Japanese Assets Changes in 40 Years

Actually, the rise in the price of the yen has already predicted the arrival of the storm. From 1977 to 1978, the Bank of Japan started to finance real estate such as lands and individual housings, and in just two years, the yen has appreciated by 8.5%. In the following years, the yen continued to appreciate, which reached its peak in 1987 with the highest value even rising by 40%. Besides, because of the Plaza Accord, the United States wish to increase the export competitiveness of its products through the depreciation of the dollar. As a result, the exchange rate of the yen against the US dollar also increased from 240 : 1 in 1985 to 121 : 1, nearly doubling. Apparently no one noticed, the bubble started to cover the whole of Japan.

US Dollar/ Japanese Yen Exchanged Rate

If the rise in the price of the yen is a raging fire, then the Japanese government's countermeasures are tantamount to adding fuel to the fire. In order to dig itself out of a hole, the Japanese government has adopted expansionary fiscal and monetary policies to stimulate the economy. However, due to the sharp increase in the Japanese currency, people are more crazy about consumption and investment, making the bubble bigger and bigger.

Everyone is immersed in joy and doesn't know what awaits them in the future.