Lee Jackson - Final Thesis - Economics - Stanford University

Figure 3.1: Long-Term Government Bond Rates (Percent) in Japan and the U.S.
Source: IMF (2012)
domestic stock and real estate market performances and foreign exchange reserves provide
proxies for capital inflows. When the currencies of past Japan and recent China were announced
to appreciate in 1985 and 2005, domestic stock markets rose dramatically, as international
speculators purchased Japanese and Chinese assets to profit from JPY and RMB strength. In an
attempt to control the rates of appreciation of their currencies, the domestic central banks,
namely the Bank of Japan (BoJ) and the People’s Bank of China (PBoC), accumulated reserves
to mitigate the effects, such as accelerating inflation, of hot money inflows. Between late 1985
and the start of 1990, the Nikkei 225 (Nikkei), one of the most commonly used benchmark for
Japanese stock market performance, about tripled. Analyzing the historical closing values of the
Nikkei dating back to the start of 1984, the five-year-to-date returns from January 1, 1989 (the
end of the first five-year period in our data set) until February 20, 1990 were more than three
standard deviations above the historical mean (see Figure 3.2). A 200% nominal return over five
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