Finanical Investment Essay

883 words - 4 pages

How Japan's Economy Turned From Ahh-so to So-soBy Jose Roncal and Jose AbboAmid 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 marginThanks 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-grabThe Japanese land grab was not confined to the country's...

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