Unemployment Risk, Homeownership and Housing Wealth: Lessons from Bubble Aftermath in Japan

The current financial crisis emanating from the US subprime problem hit the global economy, including Japan, seriously. This chapter overviews the Japanese economy with key trends in housing and labour market movements both before and after Japan's housing boom in the late 1980s. The purpose is to draw lessons from Japan's experience in order to understand the potential impact of the current crisis on households with different housing tenure status. The empirical analyses show the following results. First, for young renters, although housing prices and mortgage rates declined in the post-bubble period, access to homeownership was still difficult due to increased income uncertainties resulting from rising unemployment. Second, for homeowners, a drop in house prices adversely affected households' consumption through the (reverse) housing wealth effect. Altogether, the empirical findings can partly explain the prolonged recession in Japan, which is also applicable to the current situation.