Determinants of Land-Price Movements in Japan

The purpose of this paper is to apply spatial econometrics, a new statistical tool that has recently attracted much attention, to Japanese land-price data and investigate how land-price movements are determined in Japan. A strong emphasis is put on measuring the degree of spatial correlation of land prices, the phenomenon whereby one area's land prices are correlated with another area's land prices just because the two areas are adjacent to each other. To explore this issue, we compile regional data on land prices in the 47 prefectures in Japan and in the 23 wards in Tokyo. Japanese land prices are shown to display a high degree of spatial correlation not only at the ward level, but also at the prefecture level. We also investigate the plausibility of the claim that price formation in the Japanese land market has become more dependent on economic fundamentals since the asset bubble burst in the early 1990s. We show that although this claim may hold in commercial areas in Tokyo, there is no robust evidence that it holds for the rest of Japan.