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
So the US is only 70% or so?? What's the problem? "Double Whammy: 50-Year Record on Sept. 22. $10 Trillion on Sept. 30, 2008. The gross national debt compared to GDP (how rich we are) reached its lowest level since 1931 as Reagan took office in 1981. It skyrocketed for 12 years through Bush senior. Clinton reversed it at a peak of 67%. Bush junior crossed that line on Sept. 22 and hit 69% on Sept 30. That's the highest it's been since 1955. " (sources)
Hi makloda, Thanks for some good points but I am still not entirely "satisfied" with the reasons. First, you mentioned that real estate went up 400% from 70s to 90s. That is only annual compounded return of about 7%. Quite reasonable and hardly bubblish. Most of your reasons centred on banks not able to make a profit with all the hidden losses, but the N225 includes a majority of non-bank entities, and surely, given the favourable interest rates, they would have been able to make some very good profits. Where are these profits now? 20 years of accumulating earnings must have make the p/e close to zero by now..unless they are not really making any earnings..and if so, why? Anybody knows what the p/e of N225 is when it crashed? Its no good giving the p/e of one industrial bank. Even if the N225 crashed from a high p/e of say 50, by the time it reached 10000, it would have been an acceptable 12.5. It took a few years to reach there, but what happen to the 15 remaining years from thereon? Why didn't it go back up again?
Perhaps the Japanese are competing with the Chinese and lots of work, jobs and production moved to China.
the problem in US is not only gouvernment debt but private dept situation now. Japanese people went into the crisis with lots of savings but USA people today have negative savings since years, not good.