about three times larger than that of equities.24 The relatively low level of the aggregate equity values in total asset holdings partly explains why asset operations by the official funds or any other measures in support of equity prices-aimed at assisting city banks to pass the BIS standard-could have only a marginal effect on macroeconomic activities.<sup>25</sup> Apart from the differential size effects and a slight difference in their channels of initial shock diffusion, sirnulated declines in asset prices created similar qualitative responses. These simulations single out the negative effects of asset price deflation on the Japanese economy, for both land and equities, in the following manner:

- 1) In both cases, declines in asset prices themselves would have depreciated the yen. The rapid appreciation of the yen during the first 8 months of 1993, which lengthened the business cycle downturn, was caused mainly by the interest rate differential between the Japanese and U.S. economies.<sup>26</sup>

- 2) GDP growth stagnates due to a slowdown in domestic absorption, despite the positive contribution from foreign sectors helped by currency depreciation.

- 3) Stagnation in domestic absorption reduces money demand and therefore interest rates. However. massive deflation causes increases in real interest rates after the third or fourth year.

- 4) Private consumption stagnates due to declines in disposable income and households' net worth. Movements in real interest rates turn hostile to consumption activities the third or fourth year following the shock. Declines in private consumption are generally larger than those in disposable income due to negative wealth effects, and the household saving rate increases when dissaving is preferable to stimulating an ailing economy. 27

24 For comparison purposes, the impacts can be size adjusted using SNA statistics (see Table 1). From April 1991 to October 1993, equity prices declined by 56.4 percent in real terms and the ratio of real capital loss to the GDP was 0.95. On the other hand, land prices declined by 30.9 percent during the same period in real terms and the ratio of real capital loss to the C-DP was 1.55. This implies that the total value of land property was about three times larger than that of equities. Thus, the impact of a 75 percent decline in equity prices should, roughly speaking, be directly comparable to that of a 25 percent decline in land prices.

A decline in land prices should, in principle, have two different and opposite effects: the aforementioned negative effects on credit creation, and positive effects through declines in producers' costs where land is used as an input. The model captures the negative effects successfully but not the positive effects, and thus tends to overestimate the impact of land price deflation.

25 Measures taken in support of equity prices would normally drag down Japan's export growth by appreciating its currency.

26 This, in turn, was a product of desynchronized business cycles and opposite stances in monetary policies in Japan and the United States. The United States reached the peak of its last cycle in 1989 and a trough in 1991. As a result, the U.S. Federal Reserve Board guided interest rates lower during this period (see footnote 6) while the Japanese monetary authority took a tighter policy stance to cope with the bubble.

27 Ogawa, et al., (1994b) analyzed the effects of variation in household assets on consumption behavior in the recent Japanese context. His study found strong causality from values of liquidity assets to consumption activities, particularly in household expenditures on clothing and housing.

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