10- 1990s: Japan’s lost decade

Japanese Asset Bubble: 1986 – 1990, The bubble. 1990 -2003, The burst.
Nikki: Peak: 9 Dec 1989: 38957.44
Bottom: April 2003: 7603.76. A 80% decline!

The U.S. Financial Crisis:Lessons From Japan - Dick K. NantoSpecialist in Industry and Trade
Foreign Affairs, Defense, and Trade Division

Summary

Japan’s five bank bailout packages in the late 1990s may hold some lessons for the United States. Most of the packages were administered by the Deposit Insurance Corporation of Japan (DICJ). The packages had an announced value of $495 billion.

The DICJ reports that it provided $399 billion to Japan’s troubled financial institutions of which it has recovered $195 billion. Overcoming the crisis in Japan’s banks took a combination of capital injections, new laws and regulations, stronger oversight, a reorganization of the banking sector, moderate economic recovery, and several years of banks working off their non-performing loans. This report will be updated as
circumstances warrant.

When the U.S. Treasury planned the $700 billion bailout package (Emergency Economic Stabilization Act of 2008, H.R. 3997) to address the U.S. financial crisis, it reportedly examined the experience of Japan as it grappled with its banking crisis in the 1990s.1 This report reviews the major actions by the Japanese government in dealing with its crisis and highlights some of the lessons learned from their experience.
Like the current U.S. financial crisis, Japan’s began with stock market and real estate bubbles. During the latter half of the 1980s, Japan’s monetary authorities flooded the market with liquidity (money) in order to enable businesses to cope with the rising value of the yen. Businesses did invest in new capital equipment to become more competitive in international markets, but the excess liquidity also found its way into speculation in
Japan’s stock market, in real estate ventures, and in foreign investments. At that time, the market value of both land and equities was rising so fast that investors and speculators could hardly miss.

Japan’s Nikkei stock market average peaked in 1989 at 40,000 and dropped by 50% in one year and more than two-thirds to about 12,000 by August 2001. Japan’s banks are allowed to hold equities as part of their capital base. The value of the unrealized capital gains on such stock holdings dropped from $355 billion in 1989 to $42 billion in 2001. This drastically reduced key capital reserves for many banks. Also, by 2000, commercial land values in the six major metropolitan areas had fallen by 80% from their peak level in 1991. Residential and industrial land values also had fallen by nearly 20%.2


The Japanese experience of a 10-year economic winter is regarded as the template for how not to respond to the kind of conditions the global economy now confronts. The Japanese authorities were slow to respond and overly cautious when they did.

Problem: After a spectacular 1980s boom, Japan's real estate and stock markets crashed, throwing the economy into a prolonged malaise.Outcome: Early denial of the problem by the Japanese government taught policymakers elsewhere the value of responding quickly and decisively


In 2008: For Japanese equity investors, it has not just been a lost decade, it has been a lost quarter-century; the Nikkei 225 average touched a 26-year low in Nov 08.

"The experience of Japan in the 1990s was that indeed government spending, while it may not produce a permanent cure, can greatly alleviate the pressures on the economy," Paul Krugman said.