The head of the Société Générale Asset Management Japan Core Alpha team commented on how the past can inform the future.
Almost 20 years ago Japan entered a protracted financial crisis, bear market and economic downturn. What lessons does that experience hold as the West struggles with a financial crisis?
The specifics of every banking crisis vary by country and by cycle, but the general forces are the same. When expanding gearing gives way to contracting debt, the stage is set for a liquidity crisis.
Three kinds of adjustment are needed before stability can return. First, asset values must discount the credit- constrained world. That is already happening with a vengeance, but take care not to assume too quickly that the process is complete.
Second, the banking sector needs to write off bad debts, consolidate (a polite way of saying shrink), and rebuild its capital base. In banking terms, completing the MUFG merger in October 2005 marked the end of the crisis.
Third, the real economy must also adjust to the new credit constraints. In Japan’s case, car sales, land prices, bank lending and the household spending index have, like share prices, returned to the levels of the early 1980s.
1 comment:
This is very interesting, in 1997 the asian finacial crisis occured and many asian economies were devastated from this event. They seemed to be back on track not long after the crisis. It seems as though the United States needs to look at other methods of dealing with the crisis, instead of just throwing money at the problem and hoping it will fix itself.
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