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The Lost Decade: Lessons From Japan's Real Estate Crisis

What Was Japan's "Lost Decade" Real Estate Crisis? Free markets economies are subject tocycles.Econo

The Lost Decade: Lessons From Japan's Real Estate Crisis

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The traditional measure of an economicrecessionis two or more consecutive quarters of falling gross domestic product. There are also economic depressions, which are extended periods of economic contraction such as theGreat Depressionof the 1930s.\nFrom 1991 through 2001, Japan experienced a period of economicstagnationand price deflation known as \"Japan'sLost Decade.\" While the Japanese economy outgrew this period, it did so at a much slower pace than other industrialized nations. During this period, the Japanese economy suffered from both acredit crunchand aliquidity trap.\nUnderstanding Japan's \"Lost Decade\" Real Estate CrisisJapan's Lost Decade\nJapan's economy was the envy of the world in the 1980s—it grew at an average annual rate (as measured by GDP) of 3.89% in the 1980s, compared to 3.07% in the United States.1But Japan's economy ran into troubles in the 1990s.\nFrom 1991 to 2003, the Japanese economy, as measured by GDP, grew only 1.14% annually, well below that of other industrialized nations.1\nKEY TAKEAWAYS\n<ul>\n <li>Japan's \"Lost Decade\" was a period that lasted from about 1991 to 2001 that saw a great slowdown in Japan's previously bustling economy.</li>\n <li>The main causes of this economic slowdown were raising interest rates that set a liquidity trap at the same time that a credit crunch was unfolding.</li>\n <li>The major lessons economies can take from Japan's \"Lost Decade\" include using available public funds to restructure banks' balance sheets and that sometimes the fear of inflation can cause stagnation.</li>\n</ul>\nJapan's equity andreal estatebubbles burst starting in the fall of 1989. Equity values plunged 60% from late 1989 to August 1992,2whileland valuesdropped throughout the 1990s, falling an incredible 70% by 2001.3\nThe Bank of Japan's Interest Rate Mistakes\nIt is generally acknowledged that theBank of Japan(BoJ), Japan'scentral bank, made several mistakes that may have added to and prolonged the negative effects of the bursting of the equity and real estate bubbles.\nFor example, monetary policy was stop-and-go; concerned aboutinflationand asset prices, the Bank of Japan put the brakes on themoney supplyin the late 1980s, which may have contributed to the bursting of the equity bubble. Then, as equity values fell, the BoJ continued to raise interest rates because it remained concerned with still-appreciating real estate values.4\nHigher interest rates contributed to the end of rising land prices, but they also helped the overall economy slide into a downward spiral. In 1991, as equity and land prices fell, the Bank of Japan dramatically reversed course and began to cut interest rates.5But it was too late, aliquiditytrap had already been set, and a credit crunch was setting in.\nA Liquidity Trap\nA liquidity trap is an economic scenario in which households and investors sit on cash; either in short-term accounts or literally as cash on hand.\nThey might do this for a few reasons: they have no confidence that they can earn a higherrate of returnby investing, they believedeflationis on the horizon (cash will increase in value relative to fixed assets), or deflation already exists. All three reasons are highly correlated, and under such circumstances, household and investor beliefs become reality.\nIn a liquidity trap, low interest rates, as a matter ofmonetary policy, become ineffective. People and investors simply don't spend or invest. They believe goods and services will be cheaper tomorrow, so they wait to consume, and they believe they can earn a better return by simply sitting on their money than by investing it. The Bank of Japan'sdiscount ratewas 0.5% for much of the 1990s, but it failed to stimulate the Japanese economy, and deflation persisted.6\nBreaking Out of a Liquidity Trap\nTo break out of a liquidity trap, households and businesses have to be willing to spend and invest. One way of getting them to do so is throughfiscal policy. Governments can give money directly to consumers through reductions intax rates, issuances of tax rebates, and public spending.\nJapan tried several fiscal policy measures to break out of its liquidity trap, but it is generally believed that these measures were not executed well—money was wasted on inefficient public works projects and given to failing businesses. Most economists agree that for fiscal stimulus policy to be effective, money must be allocated efficiently. In other words, let the market decide where to spend and invest by placing money directly in the hands of consumers. (For related reading, check outWhat Is Fiscal Policy?)\nAnother way to break out of the liquidity trap is to \"re-inflate\" the economy by increasing the actual supply of money as opposed to targetingnominal interest rates. A central bank can inject money into an economy without regard for an established target interest rate (such as thefed funds ratein the U.S.) through the purchase ofgovernment bondsinopen-market operations.\nThis is when a central bank purchases a bond, in which case it effectively exchanges it for cash, which increases the money supply. This is known as themonetizationof debt. (It should be noted that open-market operations are also used to attain and maintain target interest rates, but when a central bank monetizes the debt, it does so without regard for a target interest rate.) (To learn more, readHow do central banks inject money into the economy?)\nIn 2001, the Bank of Japan began to target the money supply instead of interest rates, which helped to moderate deflation and stimulateeconomic growth.5 However, when a central bank injects money into thefinancial system, banks are left with more money on hand, but also must be willing to lend that money out. This brings us to the next problem Japan faced: a credit crunch.\nCredit Crunch\nA credit crunch is an economic scenario in which banks have tightened lending requirements and for the most part, do not lend.\nThey may not lend for several reasons, including: 1) the need to hold onto reserves in order repair theirbalance sheetsafter suffering loses, which happened to Japanese banks that had invested heavily in real estate, and 2) there might be a generalpullbackin risk-taking, which happened in the United States in 2007 and 2008 asfinancial institutionsthat initially suffered losses related tosubprime mortgagelending pulled back in all types of lending, deleveraged their balance sheets, and generally sought to reduce their levels of risk in all areas.\nCalculated risk-taking and lending is the life-blood of afree marketeconomy. When capital is put to work, jobs are created, spending increases, efficiencies are discovered (productivity increases), and the economy grows. On the other hand, when banks are reluctant to lend, it is difficult for the economy to grow.\nIn the same manner that a liquidity trap leads to deflation, a credit crunch is also conducive to deflation as banks are unwilling to lend, and therefore consumers and businesses are unable to spend, causing prices to fall.\nSolutions to a Credit Crunch\nJapan also suffered from a credit crunch in the 1990s and Japanese banks were slow to take losses. Even though public funds were made available to banks to restructure their balance sheets, they failed to do so because of the fear of stigma associated with revealing long-concealed losses and the fear of losing control to foreign investors.7 To break out of a credit crunch, bank losses must be recognized, the banking system must be transparent, and banks must gain confidence in their ability to assess and manage risk.\nClearly, deflation causes a lot of problems. When asset prices are falling, households and investors hoard cash because cash will be worth more tomorrow than it is today. This creates a liquidity trap. When asset prices fall, the value ofcollateralbacking loans falls, which in turn leads to bank losses. When banks suffer losses, they stop lending, creating a credit crunch.\nMost of the time, we think ofinflationas a very bad economic problem, which it can be, but re-inflating an economy might be precisely what is needed to avoid prolonged periods of slow growth such as what Japan experienced in the 1990s.\nThe problem is that re-inflating an economy isn't easy, especially when banks are unwilling to lend. Notable American economistMilton Friedmansuggested that the way to avoid a liquidity trap is by bypassingfinancial intermediariesand giving money directly to individuals to spend. This is known as \"helicopter money,\" because the theory is that a central bank could literally drop money from a helicopter.8 This also suggests that regardless of which country you live in, life is all about being in the right place at the right time.","source":"lsy1606203311635","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>The Lost Decade: Lessons From Japan's Real Estate Crisis</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nThe Lost Decade: Lessons From Japan's Real Estate Crisis\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-06-30 09:30 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://www.investopedia.com/articles/economics/08/japan-1990s-credit-crunch-liquidity-trap.asp?utm_campaign=quote-yahoo&utm_source=yahoo&utm_medium=referral>investopedia</a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\nWhat Was Japan's \"Lost Decade\" Real Estate Crisis?\nFree markets economies are subject tocycles.Economic cyclesconsist of fluctuating periods of economic expansion andcontractionas measured by a nation...\n\n<a href=\"https://www.investopedia.com/articles/economics/08/japan-1990s-credit-crunch-liquidity-trap.asp?utm_campaign=quote-yahoo&utm_source=yahoo&utm_medium=referral\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{},"source_url":"https://www.investopedia.com/articles/economics/08/japan-1990s-credit-crunch-liquidity-trap.asp?utm_campaign=quote-yahoo&utm_source=yahoo&utm_medium=referral","is_english":true,"share_image_url":"https://static.laohu8.com/e9f99090a1c2ed51c021029395664489","article_id":"1160246970","content_text":"What Was Japan's \"Lost Decade\" Real Estate Crisis?\nFree markets economies are subject tocycles.Economic cyclesconsist of fluctuating periods of economic expansion andcontractionas measured by a nation'sgross domestic product(GDP).\nThe length of economic cycles (periods of expansion vs. contraction) can vary greatly. The traditional measure of an economicrecessionis two or more consecutive quarters of falling gross domestic product. There are also economic depressions, which are extended periods of economic contraction such as theGreat Depressionof the 1930s.\nFrom 1991 through 2001, Japan experienced a period of economicstagnationand price deflation known as \"Japan'sLost Decade.\" While the Japanese economy outgrew this period, it did so at a much slower pace than other industrialized nations. During this period, the Japanese economy suffered from both acredit crunchand aliquidity trap.\nUnderstanding Japan's \"Lost Decade\" Real Estate CrisisJapan's Lost Decade\nJapan's economy was the envy of the world in the 1980s—it grew at an average annual rate (as measured by GDP) of 3.89% in the 1980s, compared to 3.07% in the United States.1But Japan's economy ran into troubles in the 1990s.\nFrom 1991 to 2003, the Japanese economy, as measured by GDP, grew only 1.14% annually, well below that of other industrialized nations.1\nKEY TAKEAWAYS\n\nJapan's \"Lost Decade\" was a period that lasted from about 1991 to 2001 that saw a great slowdown in Japan's previously bustling economy.\nThe main causes of this economic slowdown were raising interest rates that set a liquidity trap at the same time that a credit crunch was unfolding.\nThe major lessons economies can take from Japan's \"Lost Decade\" include using available public funds to restructure banks' balance sheets and that sometimes the fear of inflation can cause stagnation.\n\nJapan's equity andreal estatebubbles burst starting in the fall of 1989. Equity values plunged 60% from late 1989 to August 1992,2whileland valuesdropped throughout the 1990s, falling an incredible 70% by 2001.3\nThe Bank of Japan's Interest Rate Mistakes\nIt is generally acknowledged that theBank of Japan(BoJ), Japan'scentral bank, made several mistakes that may have added to and prolonged the negative effects of the bursting of the equity and real estate bubbles.\nFor example, monetary policy was stop-and-go; concerned aboutinflationand asset prices, the Bank of Japan put the brakes on themoney supplyin the late 1980s, which may have contributed to the bursting of the equity bubble. Then, as equity values fell, the BoJ continued to raise interest rates because it remained concerned with still-appreciating real estate values.4\nHigher interest rates contributed to the end of rising land prices, but they also helped the overall economy slide into a downward spiral. In 1991, as equity and land prices fell, the Bank of Japan dramatically reversed course and began to cut interest rates.5But it was too late, aliquiditytrap had already been set, and a credit crunch was setting in.\nA Liquidity Trap\nA liquidity trap is an economic scenario in which households and investors sit on cash; either in short-term accounts or literally as cash on hand.\nThey might do this for a few reasons: they have no confidence that they can earn a higherrate of returnby investing, they believedeflationis on the horizon (cash will increase in value relative to fixed assets), or deflation already exists. All three reasons are highly correlated, and under such circumstances, household and investor beliefs become reality.\nIn a liquidity trap, low interest rates, as a matter ofmonetary policy, become ineffective. People and investors simply don't spend or invest. They believe goods and services will be cheaper tomorrow, so they wait to consume, and they believe they can earn a better return by simply sitting on their money than by investing it. The Bank of Japan'sdiscount ratewas 0.5% for much of the 1990s, but it failed to stimulate the Japanese economy, and deflation persisted.6\nBreaking Out of a Liquidity Trap\nTo break out of a liquidity trap, households and businesses have to be willing to spend and invest. One way of getting them to do so is throughfiscal policy. Governments can give money directly to consumers through reductions intax rates, issuances of tax rebates, and public spending.\nJapan tried several fiscal policy measures to break out of its liquidity trap, but it is generally believed that these measures were not executed well—money was wasted on inefficient public works projects and given to failing businesses. Most economists agree that for fiscal stimulus policy to be effective, money must be allocated efficiently. In other words, let the market decide where to spend and invest by placing money directly in the hands of consumers. (For related reading, check outWhat Is Fiscal Policy?)\nAnother way to break out of the liquidity trap is to \"re-inflate\" the economy by increasing the actual supply of money as opposed to targetingnominal interest rates. A central bank can inject money into an economy without regard for an established target interest rate (such as thefed funds ratein the U.S.) through the purchase ofgovernment bondsinopen-market operations.\nThis is when a central bank purchases a bond, in which case it effectively exchanges it for cash, which increases the money supply. This is known as themonetizationof debt. (It should be noted that open-market operations are also used to attain and maintain target interest rates, but when a central bank monetizes the debt, it does so without regard for a target interest rate.) (To learn more, readHow do central banks inject money into the economy?)\nIn 2001, the Bank of Japan began to target the money supply instead of interest rates, which helped to moderate deflation and stimulateeconomic growth.5 However, when a central bank injects money into thefinancial system, banks are left with more money on hand, but also must be willing to lend that money out. This brings us to the next problem Japan faced: a credit crunch.\nCredit Crunch\nA credit crunch is an economic scenario in which banks have tightened lending requirements and for the most part, do not lend.\nThey may not lend for several reasons, including: 1) the need to hold onto reserves in order repair theirbalance sheetsafter suffering loses, which happened to Japanese banks that had invested heavily in real estate, and 2) there might be a generalpullbackin risk-taking, which happened in the United States in 2007 and 2008 asfinancial institutionsthat initially suffered losses related tosubprime mortgagelending pulled back in all types of lending, deleveraged their balance sheets, and generally sought to reduce their levels of risk in all areas.\nCalculated risk-taking and lending is the life-blood of afree marketeconomy. When capital is put to work, jobs are created, spending increases, efficiencies are discovered (productivity increases), and the economy grows. On the other hand, when banks are reluctant to lend, it is difficult for the economy to grow.\nIn the same manner that a liquidity trap leads to deflation, a credit crunch is also conducive to deflation as banks are unwilling to lend, and therefore consumers and businesses are unable to spend, causing prices to fall.\nSolutions to a Credit Crunch\nJapan also suffered from a credit crunch in the 1990s and Japanese banks were slow to take losses. Even though public funds were made available to banks to restructure their balance sheets, they failed to do so because of the fear of stigma associated with revealing long-concealed losses and the fear of losing control to foreign investors.7 To break out of a credit crunch, bank losses must be recognized, the banking system must be transparent, and banks must gain confidence in their ability to assess and manage risk.\nClearly, deflation causes a lot of problems. When asset prices are falling, households and investors hoard cash because cash will be worth more tomorrow than it is today. This creates a liquidity trap. When asset prices fall, the value ofcollateralbacking loans falls, which in turn leads to bank losses. When banks suffer losses, they stop lending, creating a credit crunch.\nMost of the time, we think ofinflationas a very bad economic problem, which it can be, but re-inflating an economy might be precisely what is needed to avoid prolonged periods of slow growth such as what Japan experienced in the 1990s.\nThe problem is that re-inflating an economy isn't easy, especially when banks are unwilling to lend. Notable American economistMilton Friedmansuggested that the way to avoid a liquidity trap is by bypassingfinancial intermediariesand giving money directly to individuals to spend. This is known as \"helicopter money,\" because the theory is that a central bank could literally drop money from a helicopter.8 This also suggests that regardless of which country you live in, life is all about being in the right place at the right time.","news_type":1},"isVote":1,"tweetType":1,"viewCount":99,"commentLimit":10,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"symbols":[],"verified":2,"subType":0,"readableState":1,"langContent":"EN","currentLanguage":"EN","warmUpFlag":false,"orderFlag":false,"shareable":true,"causeOfNotShareable":"","featuresForAnalytics":[],"commentAndTweetFlag":false,"andRepostAutoSelectedFlag":false,"upFlag":false,"length":8,"xxTargetLangEnum":"ORIG"},"commentList":[],"hasMoreComment":false,"orderType":2}