Current Account Surplus, Asset Prices and Wealth Effect in Japan, Korea and Taiwan

The unusual movements of the asset prices in Japan, Korea and Taiwan during the second half of 1980s need to be explained. In this paper we argue that they resulted from excess liquidity and this, in turn, a consequence of the accumulated current account surplus. Under the peculiar setting of these countries' asset markets, the excess liquidity was enough to trigger an inflationary spiral in asset markets. The high asset values tend to activate wealth effect to reduce excess saving. The resulting decline of current account surplus would shift the liquidity out of domestic asset markets and start a chain reaction to depress asset prices. Our analysis suggests that the sustainability based on the continued capital flows from the surplus countries is transient in nature.