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The lost decade: credit crunch, stimulus, and broken banks

29 events 1 source 1990 to February 1999 created 21 Jul 2026, 06:21

The long post-bubble damage: credit contraction, fiscal packages, bad banks, deflation pressure, unemployment, bank rescues, and social pain as policy fights over the diagnosis.

The long post-bubble damage: credit contraction, fiscal packages, bad banks, deflation pressure, unemployment, bank rescues, and social pain as policy fights over the diagnosis.

Figures Richard Werner

Linked to

this parallel The bankers this part of Princes of the Yen: Japan built, bubbled, and broken this parallel The welfare state this part of Money and finance

29 newly added in the last 14 days

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    Collapse of the Japanese bubble

    also in Japan's asset bubble: credit orders, land, stocks, and the Nikkei, Princes of the Yen: Japan built, bubbled, and broken

    From 1990 onward bank loan growth slowed, asset prices fell, speculators went bankrupt, and about 100 trillion yen of loans turned into bad debts, pushing Japan into its worst recession since the Great Depression.

    • This is what happened from 1990 onward. Bank loan growth slowed. As asset prices fell, speculators were bankrupted and banks were left holding the bag.
      Princes of the Yen
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    Asset prices collapse and the bust begins

    also in Japan's asset bubble: credit orders, land, stocks, and the Nikkei, Princes of the Yen: Japan built, bubbled, and broken

    From January 1990 to December 1994 Japanese stock and land prices halved, bankruptcies soared to postwar highs, several banks and securities firms became insolvent, and the boom turned into the biggest slump since the 1930s.

    • Between January 1990 and December 1994, stock and land prices halved. Many companies and individuals who had borrowed money to purchase land speculatively found themselves unable to service their debts, let alone repay the principal.
      Princes of the Yen
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    EMEAP central bank club formed

    also in Asian crisis and the blocked Asian Monetary Fund, Paper money, central banks, and credit creation, Princes of the Yen: Japan built, bubbled, and broken

    In 1991 the eleven central banks of the East Asia and Pacific region formed the Executives' Meeting of East Asia-Pacific Central Banks (EMEAP), a low-profile club whose deputy governors met twice a year.

    • Already in 1991, the eleven central banks of the East Asia and Pacific region formed an exclusive club, called the Executives’ Meeting of East Asia-Pacific Central Banks, or EMEAP.
      Princes of the Yen
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    Japan slides into its longest postwar recession

    also in Paper money, central banks, and credit creation, Princes of the Yen: Japan built, bubbled, and broken

    With paralyzed banks shrinking credit creation, Japan's economy slid from 1991 into the longest and deepest postwar recession since the 1930s, with unemployment at postwar records and probably more than five million jobs lost.

    • Thus, from 1991 onward, Japan’s economy slid into the longest and deepest postwar recession since the 1930s. Unemployment soared to postwar records.
      Princes of the Yen
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    U.S. recession of 1991 and rapid Fed reflation

    also in Paper money, central banks, and credit creation, Princes of the Yen: Japan built, bubbled, and broken

    After a credit boom turned to bust and bad debts paralyzed U.S. banks, real GDP contracted about 1 percent in 1991; the Federal Reserve printed money from 1990 onward and the economy had fully recovered by 1992.

    • In 1991, real GDP contracted by approximately 1 percent. How long this recession was going to last was in the hands of one institution—the Federal Reserve. It needed to print money. That is what it did, from 1990 onward.
      Princes of the Yen
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    Bank of Japan begins 1990s rate-cutting cycle

    also in Japan's asset bubble: credit orders, land, stocks, and the Nikkei, Paper money, central banks, and credit creation, Princes of the Yen: Japan built, bubbled, and broken

    The Bank of Japan lowered the official discount rate ten times during the 1990s, starting with the first cut in July 1991 from 6 percent, reaching 1.75 percent by September 1993 and 0.5 percent by September 1995.

    • The Bank of Japan lowered the ODR ten times in the decade of the 1990s, beginning with the first reduction in July 1991, before which it stood at 6 percent. Until September 1993 it was lowered seven times, reaching 1.75 percent. The ODR was further lowered to 1.0 percent in April 1995 and to 0.5 percent in September 1995.
      Princes of the Yen
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    Four massive fiscal stimulus packages

    also in Paper money, central banks, and credit creation, Princes of the Yen: Japan built, bubbled, and broken

    Between 1992 and 1994 the Japanese government added four large fiscal stimulus packages totaling 45 trillion yen to regular spending, but without central bank credit expansion they failed to produce a recovery and only increased government debt.

    • Between 1992 and 1994, four massive fiscal stimulus packages amounting to ¥45 trillion were added on to regular government spending.
      Princes of the Yen
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    High-powered money contracts despite falling rates

    also in Paper money, central banks, and credit creation, Princes of the Yen: Japan built, bubbled, and broken

    Although interest rates had been falling since 1991, the Bank of Japan's supply of high-powered money contracted for most of 1992, leading economist Iwata to warn that the central bank would create a recession unless it expanded the money supply.

    • Using this analysis, Iwata points out that the central bank tightened monetary policy too late and then failed to stimulate the economy for too long (while interest rates had been falling since 1991, the supply of high-powered money contracted for most of 1992).38
      Princes of the Yen
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    Sharp reduction in Japanese credit creation begins

    also in Paper money, central banks, and credit creation, Princes of the Yen: Japan built, bubbled, and broken

    The author identifies a sharp reduction in credit creation beginning in 1992, triggered by bad debts in the banking system, as the cause of Japan's recession.

    • It further demonstrated that the cause of Japan’s recession has been the sharp reduction in credit creation that began in 1992 and was triggered by the bad debts in the banking system.
      Princes of the Yen
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    Mieno links the recession to structural transformation

    also in Princes of the Yen: Japan built, bubbled, and broken

    In 1993, with the recession underway, Governor Mieno said the downturn was making everyone conscious of the need to implement the transformation envisaged by the Maekawa report.

    • In 1993, when the recession had already started (triggered by window guidance), Mieno pointed out that thanks to this recession everyone was becoming “conscious of the need to implement such transformation,” as the Maekawa report had envisaged.
      Princes of the Yen
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    Thailand deregulates capital account and creates the BIBF

    also in Asian crisis and the blocked Asian Monetary Fund, Princes of the Yen: Japan built, bubbled, and broken

    In 1993 Thailand aggressively deregulated its capital account and established the Bangkok International Banking Facility, allowing Thai corporations and banks to borrow from abroad for the first time in the postwar era; Korea and Indonesia adopted similar policies around the same time.

    • In that year, Thailand implemented a policy of aggressive deregulation of the capital account and the establishment of the Bangkok International Banking Facility (BIBF). This banking facility enabled the corporate and banking sector to borrow liberally from abroad—the first time in the postwar era that Thai borrowers could do so.
      Princes of the Yen
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    Credit creation turns negative and nominal GDP shrinks

    also in Paper money, central banks, and credit creation, Princes of the Yen: Japan built, bubbled, and broken

    Bank credit creation turned negative in late 1994, producing negative nominal GDP growth in early 1995, the first such contraction in postwar history and the first since 1931.

    • Credit creation remained minimal and even turned negative in late 1994—resulting in negative nominal GDP growth in early 1995—for the first time in postwar history; indeed, the first time since 1931.14
      Princes of the Yen
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    First Japanese bond bubble

    also in Princes of the Yen: Japan built, bubbled, and broken

    Japan's first bond bubble began in early 1995 with benchmark yields at 4.7 percent and lasted until September 1998, by which time yields had fallen four hundred basis points to 0.7 percent, giving large banks significant capital gains.

    • The first Japanese bond bubble began in early 1995, when benchmark bond yields stood at 4.7 percent, and lasted until September 1998, when bond yields had fallen by four hundred basis points to an extraordinary 0.7 percent.9
      Princes of the Yen
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    Asian financial crisis

    also in Asian crisis and the blocked Asian Monetary Fund, Paper money, central banks, and credit creation, Princes of the Yen: Japan built, bubbled, and broken, The IMF, the World Bank, and the developing world

    In 1997 investors pulled out of Korea, Thailand, and Indonesia while central banks forced commercial banks to restrict credit; the asset bubbles burst and by late 1997 all three countries were insolvent.

    • In 1997, investors pulled out. Simultaneously, the central banks forced the commercial banks to restrict credit creation. The bubbles burst.
      Princes of the Yen
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    Financial Supervisory Authority opens and closes LTCB and NCB

    also in Big Bang Japan: the Ministry of Finance loses power, Princes of the Yen: Japan built, bubbled, and broken, The Bank of Japan's window-guidance machine

    Bank supervision was transferred from the Ministry of Finance to the new independent Financial Supervisory Authority, which began business in June 1998 by closing the LTCB and NCB banks.

    • The new FSA began business with a vengeance in June 1998, closing two amakudari banks, LTCB and NCB.
      Princes of the Yen
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    New York Fed organizes LTCM bailout

    also in Asian crisis and the blocked Asian Monetary Fund, Princes of the Yen: Japan built, bubbled, and broken

    At the end of September 1998, New York Fed chairman William McDonough summoned the heads of major Wall Street and European banks and organized a cartel-like bailout of the failing hedge fund LTCM, averting a full-blown default.

    • At the end of September, William McDonough, the chairman of the New York Fed, summoned some of the most powerful men of world finance to the boardroom on the tenth floor of the New York Federal Reserve.
      Princes of the Yen
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    Bank of Japan withdraws credit in 1999

    also in Paper money, central banks, and credit creation, Princes of the Yen: Japan built, bubbled, and broken, Quantitative easing begins in Japan

    The Bank of Japan sharply reduced its credit creation in 1999, actively withdrawing credit for most of the year; the yen returned toward 100 per dollar and the 1999 recovery stalled in 2000.

    • The Bank of Japan reduced its credit creation sharply in 1999, actively withdrawing credit from the economy for most of the year. The yen moved back close to ¥100/$, and a year later the recovery of 1999 stalled.
      Princes of the Yen
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    Public money injected into Japanese banks

    also in Princes of the Yen: Japan built, bubbled, and broken

    In February 1999 Japanese banks received around 10 trillion yen in public and third-party money, part of the resources that allowed the bubble-era primary bad debts to be largely written off.

    • Banks brought at least ¥33 trillion through derivatives and other methods onto their balance sheets, and they received around ¥10 trillion in public and third-party money in February 1999.
      Princes of the Yen
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    Zero interest rate policy adopted

    also in Princes of the Yen: Japan built, bubbled, and broken, Quantitative easing begins in Japan

    In February 1999 the Bank of Japan let the overnight call rate fall to 0.1 percent, a stance called the zero interest rate policy, after cutting it to 0.33 percent in October 1998.

    • Three years later, in October 1998, the Bank of Japan lowered the call rate to a new low of 0.33 percent. In February 1999, it fell to 0.1 percent—at the time called a “zero interest rate policy.”
      Princes of the Yen
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Further reading

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