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Sunday, March 23, 2008

Japan's Financial Services Minister Offers Advice for U.S.

by Calculated Risk on 3/23/2008 07:38:00 PM

From the Financial Times: US can learn from Japan’s crisis

The US should inject public funds into its financial system, which is undergoing a worse crisis than that experienced by Japan during its non-performing loan crisis, according to Japan’s financial services minister.

“It is essential [for the US] to understand that given Japan’s lesson, public fund injection [into the financial sector] is unavoidable,” Yoshimi Watanabe told the Financial Times.
The remarks are the first public expression of concern by a Japanese cabinet minister that the impact of the current financial market turmoil could be much more serious than Japan’s experience during its “lost decade” of abnormally slow economic growth in the 1990s.
All through the '90s U.S. policy makers offered unsolicited advice to Japan, so turnaround is probably fair play. Still, given Japan's "lost decade", it isn't very comforting receiving advice from Japan.

Note: I'm not an expert on Japan, but I believe that the Japanese real estate bubble was much larger (relative to their economy) than the U.S. bubble. Here are some numbers I found (If anyone has better data, please let me know):
At the market's peak in 1991, all the land in Japan, a country the size of California, was worth about $18 trillion ...
Japan's GDP (in dollars) was about $3.5 trillion in '91, so the value of all real estate was about 5 times GDP.

Using the Fed's Flow of Funds report, the value of U.S. real estate at the end of 2007 was:
Households and Nonprofit Organizations, $22.5 trillion
Nonfinancial Corporate Business, $8.8 trillion
Noncorporate Business, $7.3 trillion

For a total of $38.6 trillion. GDP in 2007 was $13.8 trillion, so value of U.S. real estate was about 2.8 times GDP (maybe slightly higher at the peak).

There are many other differences between Japan's asset bubble of the early '90s, and the current U.S. asset bubble - but it does appear that Japan's bubble was significantly larger (relative to their economy).