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

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.

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

## 1990 — Collapse of the Japanese bubble

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

## 1990 to 1999 — Decade of fiscal stimulus packages

During the 1990s the Japanese government implemented over a dozen large-scale spending packages totaling more than 145 trillion yen, without producing a sustained recovery.

> "During the 1990s, over a dozen large-scale government spending packages had been implemented, amounting in aggregate to over ¥145 trillion—also apparently to no avail."
> — Princes of the Yen

## January 1990 to December 1994 — Asset prices collapse and the bust begins

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

## March 1990 — Unemployment hits record low of 2 percent

At the height of the boom's labor shortage, Japanese unemployment fell to a record low of 2 percent in March 1990.

> "Unemployment hit a record low of 2 percent in March 1990."
> — Princes of the Yen

## 1991 — EMEAP central bank club formed

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

## 1991 — Japan slides into its longest postwar recession

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

## 1991 to 1992 — U.S. recession of 1991 and rapid Fed reflation

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

## July 1991 to September 1995 — Bank of Japan begins 1990s rate-cutting cycle

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

## 1992 — Credit crunch hits small firms

As banks burdened with bad debts grew risk averse in the early 1990s, they cut lending to small and medium-sized firms, which suffered a credit crunch from 1992; unemployment began rising and consumption slumped.

> "From 1992 onward, small firms suffered from a credit crunch.23"
> — Princes of the Yen

## 1992 to 1994 — Four massive fiscal stimulus packages

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

## 1992 — High-powered money contracts despite falling rates

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

## 1992 — Japan's decade of fiscal stimulation packages

Beginning in 1992, Japan implemented ten fiscal stimulation packages totaling 146 trillion yen, with government spending contributing almost half of economic growth in the 1990s.

> "Since 1992, ten fiscal stimulation packages amounted to ¥146 trillion."
> — Princes of the Yen

## 1992 — Sharp reduction in Japanese credit creation begins

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

## 1993 — Mieno links the recession to structural transformation

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

## 1993 — Thailand deregulates capital account and creates the BIBF

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

## 1994 to 1995 — Credit creation turns negative and nominal GDP shrinks

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

## 1995 to September 1998 — First Japanese bond bubble

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

## 1995 — Unemployment reaches a postwar high

In the first quarter of 1995 Japanese unemployment reached a postwar high, with the actual number of jobless probably topping five million by early 1996 and recession-related suicides also at a postwar high.

> "In the first quarter of 1995, unemployment had reached a postwar high, creating human misery. The actual number of jobless probably topped five million people in early 1996.13"
> — Princes of the Yen

## 1995 — Yen surges to around 80 per dollar

By mid-1995 the yen had risen to around 80 to the dollar, its peak coming in April 1995, squeezing exporters as Japan's recession dragged on.

> "The yen had risen to around ¥80/$—unthinkable for many just half a year earlier. Exporters were under pressure, demand in the economy faltered, production growth slowed, inventories built up, and firms cut costs to stay in business."
> — Princes of the Yen

## 1997 — Asian financial crisis

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

## 1998 — Japanese suicides peak amid recession

Suicides in Japan rose to 31,755 in 1998, a rise linked by observers to the recession.

> "Suicides rose to 31,755 in 1998 (National Police Agency)."
> — Princes of the Yen

## June 1998 — Financial Supervisory Authority opens and closes LTCB and NCB

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

## September 1998 — Call rate lowered to near zero

In September 1998 the overnight call rate was lowered to about 0.3 percent while ten-year government bond yields dropped to 0.7 percent, sparking debate that interest rate policy had reached its limit.

> "The lowering of the overnight call rate to about 0.3 percent in September 1998 coincided with a drop in ten-year government bond yields to 0.7 percent."
> — Princes of the Yen

## September 1998 — New York Fed organizes LTCM bailout

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

## 1999 — Bank of Japan withdraws credit in 1999

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

## 1999 — Tax money injected into Japanese banks

Public tax money was injected into Japanese banks in early 1999, and the Koizumi government proposed further injections in late 2002.

> "Tax money was actually injected into banks in early 1999. The Koizumi government proposed further tax money injections into banks in late 2002."
> — Princes of the Yen

## February 1999 — Public money injected into Japanese banks

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

## February 1999 — Zero interest rate policy adopted

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

## February 1999 — Zero interest rate policy introduced

In February 1999 the Bank of Japan guided the overnight call rate down to 0.1 percent, a stance dubbed the zero interest rate policy, after cutting it to a record low 0.33 percent in October 1998.

> "In February 1999, it fell to 0.1 percent—what at the time was called a “zero interest rate policy.”"
> — Princes of the Yen