Are We Turning Japanese?

Jim Jubak really thinks so.

Japan's crisis, like the recent one in the United States, began with an extraordinary real-estate boom. In 1987, the price of land in Japan's three biggest metropolitan areas climbed 44%. Prices went up 12% more in 1988 and then 22% in 1989.

And like the U.S. real-estate boom, the Japanese boom was fueled by cheap money. The Bank of Japan, that country's Federal Reserve, had lowered the discount rate -- the rate it charges other banks -- to a post-World War II low of 2.5% from 5% in 1984-87. In those same years, the money supply grew by better than 10% a year.

And even those official numbers don't capture the full size of the flood of cheap money. Japanese companies, including banks, were able to sell bonds in the European market with an interest rate of 1.5%. When those loans were swapped back into yen, the profits from the swap reduced the
cost of money to zero.

For those of you non-economists out there, if you want to learn more about what exactly is going on, you may want to do a little study on the “Austrian Business Cycle Theory”. There are two good podcasts you can listen to of lectures given by Dr. Joe Salerno, as he explains money, the economy, and the effects of central banking. You can watch/listen to them here and here. Each one is about 90 minutes long, but he does a good job of explaining the theory behind what causes the boom-bust cycle.