Tuesday, February 24, 2009

Japan's wipeout

Japan's painful hangover from its own version of the global financial crisis is a grim lesson for those who hope for a quick recovery from the present one. Japan is the only major industrialized country since the Great Crash of 1929 to go through a crisis of a similar scale. Like the United States and other world economies today, it suffered a market meltdown, a collapse in consumer confidence and a crisis in its banking system.

It has never fully recovered. After being knocked flat on its back by the bursting of a stock-market and real-estate bubble in the early 1990s, it stayed there for the rest of what became known as its lost decade.” It bounced back slightly after the turn of the century, only to head into trouble again as the global economy weakened. In all, the aftereffects of its crisis have lasted nearly two decades.

Japan's crisis seemed to hit like a lightning bolt from a clear blue sky. In the late 1980s, Japan was on top of the world. Its “miracle economy” had grown by an average of 10 per cent in the 1960s, 5 per cent in the 1970s and 4 per cent in the 1980s, putting its Western rivals to shame. Companies such as Honda, Canon and Sony were flooding the globe with Japanese-made cars, cameras and television sets. Japanese companies bought prized overseas assets like New York's Rockefeller Center and California's Pebble Beach golf course. In books such as Ezra Vogel's Japan as Number One, analysts predicted that Japan's tight-knit social fabric, disciplined business culture, hard-work habit and government-directed growth strategy gave it an irreversible edge over the tired economies of the West.

But trouble was brewing. Officials deregulated the financial markets and lowered interest rates, the same combination that would lead to the credit fiasco in the United States. With money easy to borrow, companies invested heavily in property and stocks, sending prices soaring. The Nikkei stock-market index more than tripled from 1985 to 1989. A square foot of land in Tokyo's Ginza shopping district was going for $139,000 (U.S.). It was said that the property around the sprawling Imperial Palace was worth more than the whole state of California.

When the bubble finally burst, it was a wipeout. The Nikkei dropped by two-thirds over the next two years. Commercial land values in the big cities fell by 80 per cent between 1991 and 2000. They never returned to their bubble levels. Neither did stocks. Today, the Nikkei stands at one-fifth of its 1989 peak.

[via kemcheca]

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