11
Mar
10

Japanese Asset Bubble


This one continues from the previous thread of biggest financial crashes (Black Monday).

The Japanese Asset Bubble was one of the biggest in the history because it took as many as 13 years for Japan to recover from the burst. The build up to the crash was as big. The bubble was between 1986 and 1991 in which the stock prices and real estate inflated and when it burst, the effects were seen till 2003 (when stock markets reached the lowest point).

The build-up to the bubble as I mentioned was big too.

In the decades following World War II, Japan implemented stringent tariffs and policies to encourage people to save their income. With more money in banks, loans and credit became easier to obtain, and with Japan running large trade surpluses, the yen appreciated against foreign currencies. This allowed local companies to invest in capital resources much more easily than their competitors overseas, which reduced the price of Japanese-made goods and widened the trade surplus further. And, with the yen appreciating, financial assets became very lucrative.

With so much money readily available for investment, speculation was inevitable, particularly in the Tokyo Stock Exchange and the real estate market. The Nikkei stock index hit its all-time high on December 29, 1989 when it reached an intra-day high of 38,957.44 before closing at 38,915.87. Additionally, banks granted increasingly risky loans.

And when the bubble burst. In 2004, prime “A” property in Tokyo’s financial districts had slumped to less than 1 percent of its peak, and Tokyo’s residential homes were less than a tenth of their peak.

The impact was huge on the financial system too. The easily obtainable credit that had helped create and engorge the real estate bubble continued to be a problem for several years to come, and as late as 1997, banks were still making loans that had a low probability of being repaid. Loan Officers and Investment staff had a hard time finding anything to invest in that would return a profit. They would sometimes resort to depositing their block of investment cash, as ordinary deposits, in a competing bank, which would bring howls of complaint from that bank’s Loan Officers and Investment staff. Correcting the credit problem became even more difficult as the government began to subsidize failing banks and businesses, creating many so-called “zombie businesses” (which lived on constant cash bailouts).

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So what’s this blog about?

Another attempt? Well yes. Attempting to figure out another sustainable model (there are some other attempts going on parallel-ly). Well, we have a lot of questions in mind. we read up stuff, we do some research to find answers to these questions. This is an attempt to publish that little 15-20 minute research.

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