Bubbles in Japan's Stock Market: A Macroeconomic Analysis

Since the 1950s, Japan's stock market has gone into bubbles every ten years or so (early 50s, early 60s, and early 70s). Then, the 1980s saw a strong bubble that went on for several years (late 1982 to the end of 1989). What caused this bubble to be so strong? Our analysis of the fundamental equation reveals that the key factor was the nominal interest rate which continued to decline until the late 1980s owing to the extremely relaxed monetary policy pursued by the Bank of Japan. Investors ' stock price expectations added to the effect of low interest rates. We show that investors tend to forecast fluctuations on the real side two to three quarters ahead of time. The bubble crashed when investors ' expectations collapsed. Since then, investors have remained bearish and the stock market has remained in the doldrums.