The two events, though separated by almost about two decades, share several striking similarities. Both bubbles were inflated by heavy speculation which, in turn, was fueled by a combination of easy availability of finance and an explosion in new, complex financial products (read: derivatives). At its dizzying height, property prices in Tokyo's Imperial Palace valued more than the entire land in Florida. During the 1980s, Japan's economy experienced rapid surge in asset prices, increase in money supply and credit, and an expansion of economic activity.
What further led to the emergence and expansion of bubble were factors like protracted monetary easing, taxations and regulations biased toward accelerating the rise in land prices, progress of financial deregulation and aggressive behavior of financial institutions. During the bubble period, Japan implemented policies that facilitated easy credit Japan and organized large trades through loans from banks. The most famous economic bubble lasted from 1986 to 1990 and it has taken Japan over a decade now to recover from that crisis, although banks are still grappling to clean their balance sheets while land prices are on a journey down south.
While such atrocious valuations may be missing from the US real estate scene, the fact is that the US housing prices kept pace with and even outpaced inflation consistently till 2005. Between 2000 and 2005, the housing prices in the US leapt up from about 5% to close to triple the digit. The mortgage mayhem has cost the US mortgage lenders dearly with many of them, including Citigroup and Merrill Lynch, writing off billions of dollars in bad investments. The billion dollar question is: Is there any lesson to be drawn from the Japanese asset bubble? |
