The American financial crisis 2008/2009 was fueled by a housingbubble. The low interest rates by the Federal Reserve Bank motivatedbanks to offer cheap mortgages to the prime mortgage market.Investment bankers also wanted a share of the ever increasing housingprices which offered better returns than treasury bonds and thus theybought numerous prime mortgages from the banks. To further drivedemand, mortgage brokers targeted the sub-prime, which has a higherrisk. Higher investment in homes thus stretched the spending power ofhomeowners. Soon, the high risk homeowners ended up defaultingtriggering a domino effect. The prices crashed and many mortgages hadbeen securitized and turned into AAA-rated securities lost theirvalue. Many financial situations were indebted and the economyfaltered.
Japan’s financial crisis of the early 1990’s is similar to theAmerican 2009/09 financial crisis. In the Japan crisis, the crisiswas fueled by over confidence in the economy where prices in thestock market and real estate were highly inflated misrepresentingaggregate demand. As a result, prices of land increased in a veryshort period. In fact, prices for commercial land increased by over300% from 1985 to 1991. This increase in land prices is similar tothe consistent increase in housing prices that characterized theAmerican crisis.
With increase in aggregate demand, governments have to increase moneysupply. Furthermore, foreign companies were injecting the real estatemarket in Japan with extra cash to build office complexes to housetheir Japanese subsidiaries. This further led to the strengthening ofthe Yen. Again, the Japanese land lease law encouraged people tohoard land anticipating a surge in prices which created artificialdemand.
Intervention by the Bank of Japan (BOJ) to increase lending ratestriggered the asset market crash. While Japanese depositors hadchanged from depositing money in banks in favor of land forspeculation purposes and stock markets, an increase in interest sawthem hurriedly withdrawing from the asset and stock market in favorof depositing in banks which caused tumbling of prices. As the pricesof assets fell, asset owners could no longer service their loans onassets that had greatly depreciated hence some defaulted and otherssought to dispose the assets. Consequently, unserviced loansaccumulated for banks thus burdening the financial institutions. Thisis similar to the housing bubble in the US where home owners couldnot continue servicing mortgages for homes that had drasticallyreduced in value.
The asset price bubble was caused by sustained low interest rates byBOJ prior to 1989. Though as early as 1986 the bank had noted anincrease in the amount of money in circulation but no remedialmeasures were taken up until 1989. The intervention came at the endof May 1989 when interest rates were hiked from 2.4% to stand at4.25% by December. In 1990, BOJ pushed interest rates higher from4.25% to 6.0 %m (The financial crisis in Japan). This led to theweakening of the Japanese currency against the dollar and assetsprices stabilized in commercial land but residential land droppeddrastically especially in Tokyo in the same way that house pricesdropped in the US.
The effects of the bubble burst were felt for several years. Consumerconfidence dropped and aggregate demand dropped and thus all majorsectors of the economy were affected negatively. High interest ratesdiscouraged investments and unemployed surged. Several financialinstitutions such as Hokkaido Takushoku Bank among others were onlysaved by the government as the economy suffered. The situation wasreversed by a stimulus package by the government that includedbailing out some banks thereby the restoring the economy on an upwardgrowth path. This is similar to the amerce case where stimuluspackages jumpstarted the economy and many firms and banks such as JPMorgan were bailed out.
The financial crisisin Japan during the 1990s: how the Bank of Japan responded and thelessons
Learnt, Bank for international settlements. 2001. Web.<http://www.bis.org/publ/bppdf/bispap06.htm>