It was a typical west London dinner party, of the kind where the guests agree not to talk about house prices but then do so anyway. One smug homeowner was in the middle of explaining why buying property makes sense when my usually placid Japanese friend Takashi suddenly jumped up in anger. ‘That’s nonsense,’ he shouted. ‘I know what it means to see house prices collapse. You British know nothing about that.’
Like many other young Japanese professionals, Takashi remains traumatised by his country’s experience. Property prices in the Land of the Rising Sun have so far fallen by 54 per cent since peaking in 1990. In some parts of Tokyo they have lost nine-tenths of their value. On average, they are back to 1979 levels, nailing the lie that house values always do well over long periods. The horrific house price crash Britain suffered in the early 1990s, with all its misery, negative equity and repossessions, was a brief setback by comparison.
To understand the causes of Japan’s downfall, we must go back to the early 1980s, when it was the world’s economic dynamo and its banks and electronics companies appeared unstoppable. Protectionists in the West were up in arms, demanding something be done. The result was the 1985 Plaza Accord: the G5 (the US, Britain, France, West Germany and Japan) agreed that the yen must be made to appreciate sharply against the dollar to reduce America’s trade deficit.
The strategy worked almost too well. As the dollar slumped against the yen, making Japanese goods more expensive, demand for Hondas and Walkmans dropped and Japan was plunged into recession. The Bank of Japan responded by slashing interest rates and injecting huge amounts of money into the economy.
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