By Kwan Weng Kin

TOKYO, JAPAN - When the US Treasury Department trotted out a plan at the weekend to buy up to US$700 billion (S$1 trillion) of soured mortgage-related assets to save US financial institutions, it no doubt reminded Japanese with long memories of what they went through after Japan's asset-inflated bubble economy collapsed in the early 1990s.
To save the country's financial system, the Japanese government decided to inject public funds into key banking institutions to help them write off a mountain of asset-related non-performing loans.

The Japanese experience contains valuable lessons that the United States can learn from, or as it would seem, has already thoroughly digested.

To the Japanese, the use of public money to stave off a crisis triggered by the massive default of sub-prime housing loans - money lent at high interest rates to low-income earners who otherwise were unable to buy homes - seems too obvious.

As far back as March this year, then financial services minister Yoshimi Watanabe told reporters: 'The US should follow Japan's example and tackle its sub-prime loan problem using public money. The situation is exactly like what Japan saw 10 years ago.'

Both crises share many similarities.

In the case of Japan, the easy monetary policies by the Bank of Japan, the central bank, fuelled a liquidity boom that led to an economic bubble in mainly commercial real estate and stock prices that reached a peak before collapsing in late 1989.

When property prices fell and developers failed to repay their loans, banks were brought to their knees.

In the case of the US too, loose monetary policy by the US Federal Reserve had sparked off the housing boom and asset-related bubble.

What is different are the ways in which the two countries have reacted to the collapse of their respective bubbles.

It took the Japanese nearly six years - from the start of the crisis to the first injection of public money - and some 10 years in all to finally bring themselves to use public money to resolutely clean up the mess.

In contrast, it has taken the US only one year, after the sub-prime loan issue reared its ugly head last autumn, to resort to the use of public funds to soak up illiquid loans.

The problem with Japan was that officials were reluctant at first to admit that there was any problem at all.

Japanese financial institutions were also slow to dispose of soured assets as bankers were optimistic that asset prices would recover.

The collapse of the 'jusen' housing loan firms in the early 1990s and the government's inept handling of the issue also made it harder when the government finally had to grapple with the resuscitation of the country's mega banks.

Jusen were special housing loan companies established by commercial banks and an agricultural bank in the 1970s with the encouragement of the Finance Ministry.

During the bubble, deregulation and competition forced the jusen firms to move away from their original mission of providing loans to homeowners and to dabble in high-risk real estate projects with loans to developers.

When land and property prices fell, jusen were left with huge debts that threatened to bring down their founder banks as well.

In the end, the government had to use 685 billion yen (S$9 billion) to lick the problem. It turned out to be a lesson in how to use public money to deal with such a crisis.

The Japanese public was against the use of taxpayers' money to bail out the jusen, although the government made it clear the companies would be liquidated.

The Japanese media also cried foul, saying the founder banks should take greater responsibility in finding a solution, while many politicians also took the same line.

Meanwhile the banks saw their bad debts piling up.

When it came to saving the banks themselves however, the solution proved much more elusive.

For a long time, Japan had adopted a policy of not letting any bank go under.

That policy changed around 1995, leading to the collapse of three banks in succession from 1997, along with securities house Yamaichi.

It marked the turning point of Japan's clean-up effort but the real work came much later.

The solution - injection of public funds into the banks - stared the Japanese government in the face.

But successive administrations, still smarting from the jusen experience, lacked the political will to authorise the use of such funds, until maverick politician Junichiro Koizumi came along in April 2001.

As prime minister, Mr Koizumi let loose his reform minister, the economist-turned-politician Heizo Takenaka, who forced Japan's mega banks to accept public funds to help them write off their bad debts, which by March 2002 had totalled 43.2 trillion yen!

Thanks to that bold, if belated move, by 2006, most Japanese banks were back in the black. They have also repaid the public money back to the government.

If anything, the Japanese experience is one of 'what not to do' rather than 'what to do'.

But the US is in fact fully informed of the Japanese experience.

When Tokyo was tackling its financial crisis, a prominent Princeton University economist at the time had criticised the central bank's role in the bubble, citing 'exceptionally poor monetary policymaking' for Japan's prolonged financial woes.

The Bank of Japan's failure to lower interest rates in the early 1990s was said to have delayed the recovery of the Japanese economy, prompting commentators to dub the painful 1990s Japan's 'lost decade'.

That Princeton economist is none other than Dr Ben Bernanke, who now heads the US Federal Reserve and is no doubt anxious to ensure that Washington does not make the same mistakes.

For the US financial crisis is much bigger than the Japanese case and failure to rein it in quickly could result in something much worse than Japan's 'lost decade'.

This article was first published in The Straits Times on September 23, 2008.