Similarities Between Credit Crisis and Japanese Asset Bubble

In: Business and Management

Submitted By coolxo
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Japan's lost decade and the present financial crisis

As world and consumer prices continue to drop, there is renewed fear of deflation. The nightmare scenario is Japan's 'lost decade'. Michael Lim Mah Hui explains what happened in Japan and considers the prospect of a similar fate.

IN the last 37 years (1970-2007), there have been 124 banking crises, an average of 3.4 every year (Laeven and Valencia, 2008). Some have been minor, others very serious and long-lasting, like the one in Japan from 1991 to 2002. The most recent is the financial crisis that started in the US in July 2007 and is playing out in front of us today. It is also the most serious, systemic, and global since the Great Depression of 1932.
A banking or financial crisis can be defined as a dislocation of the banking system where a significant number of banks and other financial institutions become illiquid and insolvent due to massive defaults on bank loans and other assets. An escalation of non-performing assets of banks will result in heavy losses depleting banks' capital. Banks become insolvent when their debt obligations (liabilities) exceed the value of their assets, i.e., the sale proceeds from their assets are inadequate to pay for their debts.

Conditions preceding a banking crisis - financial deregulation

Unbridled deregulation of the financial industry is at the heart of financial instability and crises. What began as a trickle became a wave and today it has broken loose as a financial tsunami engulfing the whole world.
Prior to the 1970s, commercial banks and savings and loans associations (S&Ls) in the US were tightly regulated to protect depositors' money. They could not engage in risky lending, interest was not paid on checking accounts, and there were ceilings on interest paid by these institutions. These were progressively loosened beginning in the early 1970s. In 1982,…...

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