a) Land and real estate prices went up 300-400% in Japan from the 70s to 1990.
b) Japan saw 40 years of growth. Institutions (Insurances, mortgage companies, banks) loaded up their books with stocks and real estate from 1950 to 1990. In the late 80s, profit gains in financial companies came largely from share price and real estate appreciation.
c) The BOJ didn't see any risks the late 1980s and raised rates in order to curb speculation (way too late).
d) There were no safeguards as to prohibit concentration in financial holdings in certain asset classes (e.g. stocks & RE)
e) Once the bubble burst, no decisive action was taken by the government and central bank until the mid 90s (again, way too late) as banks were heavily undercapitalized sitting on stock and real estate holdings that were down 60-80% from their peaks.
f) Once the bubble burst, profit margins of banks on outstanding loans went to zero or even below zero. The yield curve was very very flat for the entire 90s - hard for banks to make a dime on loans. Yet banks kept extending more and more loans throughout the 90s under unfavorable terms for the banks.
g) Because of 'structural rigidity' (formed in 40 years of growth), it was 'uncool' to liquidate non-performing loans. This helped create zombie companies and banks that should have - under normal circumstances - go out of business.
h) Stock and real estate losses and losses from non-performing loans were hidden on balance sheets for years. In 1998 - 8 years after the bubble burst - four big banks and brokerage firms went bust in Japan.
i) The Government pumped billions of Dollars into the economy in multiple instances in order to entice consumers to consume more, ballooning up the national deficit. That helped create 1-2 year upswings in GDP that eventually died out again. Government debt to GDP is somewhere around 150% in Japan now (the largest among G8 nations).
* Can it happen to the SP500. Of course it can. Let's see if Europe and the US learned the lessons from Japan.
- Quick decisive action is needed. We can all complain how confused Paulson seems, but he is still lightyears ahead of what the Japanese were doing in 1990/1991 (=nothing)
- Dead banks have to go out of business or (if too big to fail) need government ordered shotgun marriages with healthy banks
- Banks have to liquidate non-performing loans asap instead of leaving junk on the books
