Japanese Bailout

An IMF paper outlines the causes of a pricing bubble in the Japanese real estate market; aggressive banks, deregulation, poor risk management by the financial sector, and high consumer confidence top the list. Basically, banks lent very easily, consumers accessed and used mortgages easily, with low interest rates, without proper oversight by the banks or central banking system, and real estate pricing tipped out of balance once a financial problem shook up the market. Sound familiar? However dissimilar our economies, real estate markets, or the causes of our bubbles, it is worth examining the Japanese response. The NY Times in 2005 has a great article that reminds the US central bank to look back to the Japanese real estate bubble for lessons learned.

The Japanese central bank made money more easily available and set interest rates extraordinarily low, hoping to inspire more spending by consumers to combat the failing values. After that failed, the central bank interceded to subsidize failing banks. After that failed, the central bank deregulated more to allow the market to correct itself:

"Deregulation revived the Tokyo land market," said Toshio Nagashima, executive vice president at Mitsubishi Estate, one of Japan's largest real estate companies.

It is clear now that the Fed was slow to act and not in the forefront of preventing collapses. Trusting the Fed to right the ship by overseeing the pile of mortgages of unknown values evokes the Japanese central bank's failed efforts to prop up failing operations. They coined the term "zombie businesses" to refer to operations that should have gone under but were kept alive artificially. A BusinessWeek article outlines the steps that ultimately worked in Japan; they "forced the big banks to write off their bad loans and cut off loose companies that couldn't pay their debts" and "began demanding far greater levels of openness from banks" to correct the Japan's banking sector.