How Japan"s Economy Turned From Ahh-so to So-so

Amid all the media hand wringing and uproar over lax control over the financial industry, it’s easy to forget that this is not the first time a “perfect storm” of events brought a nation’s economy to the edge of the abyss. We need only look back to the ’90s to examine what happened in Japan. It can put current events in perspective – and show that, yes, countries and their economies do bounce back.

Throughout the ’80s, inflation in Japan was virtually nonexistent, even as real estate prices were soaring out of control. But during the decade of the ’90s, the world witnessed the bursting of

yet another bubble – and by bubble we mean the empty, inflated, fragile object that was the Japanese economy just before it collapsed.

Many extenuating circumstances played a role in Japan’s unraveling. There were trade tensions with the United States because of an imbalance and a huge surplus, and weakness within Japan’s own political power structure, particularly at the Ministry of Finance (MOF). Officials there came under fire and faced investigation for corruption and lax supervision of the Japanese banking industry.

In a hauntingly familiar scenario for anyone following today’s news, Japan’s real estate market, banks and stock market were equal partners in Japan’s economic downfall. Rising property values, coupled with the banking industry’s easy flow of credit, became the driving forces behind escalating stock prices. There was virtually no regulatory oversight as the greedy and unwary got swept up into a dangerous, quickly revolving spiral.

Landowners bought stocks on margin

Thanks to the undisputed success of Japanese manufacturing, particularly in the electronics and automobile industries, Japan’s banks had attained enormous wealth, and therefore, credit was readily available. Landowners began borrowing to buy stocks on margin using their property as collateral. They immediately used their stock as collateral to buy still more real estate … in a vicious cycle that looped back on itself and kept spinning.

Critics later argued that the fault lay with Japan’s unique government-industry collaboration – it encouraged banks to look to the MOF for guidance. Because of this reliance, bank officials weren’t required to have the expertise necessary to foresee or cope with financial difficulties, much less to make decisions on their own behalf.

Meanwhile, banks continued to lend at bargain interest rates as low as 2 percent, despite the fact that aggregate property value in Japan was approaching levels four to five times higher than the aggregate property values in the United States.

A global land-grab

The Japanese land grab was not confined to the country’s borders, but stretched around the globe. The Japanese snapped up international hotels, including a majority of Hawaiian properties, U.S. mainland banks, ski resorts and golf courses, including Pebble Beach. Sony cherry-picked its way through Hollywood and took over both Universal Studios and Columbia Pictures. Then, in 1989, Mitsubishi purchased a majority stake in Manhattan’s crown jewel, Rockefeller Center. Reading that last bit of news in the New York Times was a jolt to most Americans, and prompted David Letterman to make light of it. He joked that Ronald Reagan was in Japan peddling skyscrapers.

In his book on Japanese economics, author Osamu Murayama describes the way an overheated stock market, skyrocketing land prices, and banks eager to provide large-scale loans to risky businesses led to reckless lending and questionable investment practices. Many banks got into such serious trouble that it wasn’t uncommon for the entire senior management to be involved in deceiving MOF inspectors by manipulating the books and hiding damaging information.

The free ride would soon end

Japanese banks had put themselves in a precarious position. With little or no actual capital, they were heavily invested in the stock market. In 1990, when real estate prices were already beyond sustainability, banks held about 22 percent of Japan’s mortgages. By 1992, it became clear that the free ride wealthy land speculators and insider traders had enjoyed during the ’80s was going to end with serious consequences. After rising dramatically, the Nikkei stock price average fell from 38,915 in December 1989 to 14,309 in August 1992, a decline of 63 percent.

The party was over.

It wasn’t until the bubble economy collapsed, the bottom fell out of real estate, and the stock market tumbled that the full extent of the banks’ bad loans was finally revealed to the public. Banks were left with massive bad debt, and with no easy capital to borrow, they were forced to liquidate many of their overseas holdings, often at a loss.

In September 1995, the New York Times published a follow-up to its original story and summed up the tale of Japan’s bursting bubble. “Japanese Scrap $2 Billion Stake in Rockefeller,” the headline

declared. The article reported that “Mitsubishi’s sudden decision to exit Rockefeller Center is the most striking in a string of recent retreats from the trophy properties stretching from New York to Honolulu that Japanese companies acquired during a real estate binge in the 1980s.”

In the final analysis, all those individuals who had put their money into Japanese real estate or stocks – like so many others who prided themselves on being smart and opportunistic investors- learned too late that all they had really done was gambled and lost.

How Japan"s Economy Turned From Ahh-so to So-so