Given the positive “real money gap”, asset price bubbles emerged in the equity and real estate markets while general price stability was maintained (Chart 2). 2 Once land prices started to move up, the augmented collateral value of land triggered the rapid expansion of bank credit through the “financial accelerator mechanism” or the “credit cycle” on the imperfect financial market.
3 On the other hand, price stability was reinforced by the yen appreciation after the Plaza Accord in 1985 in spite of the accelerating money supply. 4 Plentiful market liquidity facilitated the active management of risk portfolios through relaxing the liquidity constraint and affected the willingness of investors to take more risks, leading to the reduction in risk and term premia.