2. Bubble Burst：A Rational or Irrational Crisis?

 

Maureen O'Hara（2008）pointed out that the causes of bubbles can be divided into four parts: "rational traders and rational markets", "rational traders and irrational markets", "irrational traders and rational markets", and "irrational traders and irrational markets". In 1989, Japanese asset price reached its peak. However, without industry support，the rise in asset price finally went into nothing, and the bubble started to burst. Is it a rational or irrational crisis?

Source: Bubbles: Some Perspectives (and Loose Talk) from History

Let's talk about people first. While it is difficult to make broad generalizations about the rationality of all individuals during the bubble period, it is fair to say that many people were caught up in the excitement and hype surrounding the rising asset prices. As a result, there were many instances of irrational exuberance and speculative behavior, as people invested in assets that were significantly overvalued (such as urban land). In general, we can say people are irrational.

 

Urban Land Price Index in Bubble Years

As for the market, the situation may be more complex. Undeniably, there are some certainly factors that contributed to the bubble, such as lax lending standards and government policies that encouraged speculation. However, although the market may have been rational to a certain extent, it's clear that the extreme price levels were unsustainable. During the bubble years, the prices of stocks and real estate in Japan soared to unprecedented levels, with the Nikkei 225 index peaking at nearly 39,000 in December 1989, and then crashing by more than 60% by the end of 1992. 

Nikkei 225 Stock Index in Bubble Years

Ultimately, it's likely that both people and market are moe irrational despite some certain factors. We can roughly define Janpanese asset price bubble as an irrational crisis.