It is widely held that Richard Werner coined the term Quantitative Easing (QE) in the Nikkei financial newspaper and The Bank of Japan applied it to their economy from March 19, 2001 until March 2006 – the introduction of negative interest rates to stimulate their economy. The U.S. did the same after the financial crisis and Covid lock-down. It is the most powerful tool the FOMC possesses and is not used lightly.
In the late 1980’s and early 1990’s, Japan had a bursting of asset prices. Perhaps the easiest component of the crisis was real estate, the asset felt to always be needed, easily financeable, essentially no maturity and cumbersome transactional process. It took years to build and had long leases. However, the Achilles heel at that time was higher financing rates. The other aspect in Japan which was not as closely discernable was that Japan survived on corporate concentration where major trading houses grew by expanding into new businesses. Over time, it was evident that similar to a chain, the system was only as strong as the weakest link.
The solution for Japan was to take the four primary banks and create “bad banks” where troubled assets were sent to either die or rebound. At that point in time, Japan was not as equipped to handle assets sales and support like the U.S. did during the banking crises and bail-out of Washington Mutual and Indy Mac.
In the U..S, large commercial assets are owned primarily by three types of investors – pension funds (through the intermediary PE firms,) banks and insurance companies – each with their own oversight authorities, asset liability models and risk profiles. In the end however, they are related as the devastation emerging in the space is now the first splash of the rock in a bond and as the rings grow we are unaware of how much damage can be controlled. The lesson learned but often forgotten about Lehman or Bear Sterns was the unknown repercussions of investments. There was no way to ringfence the risk. You can compare that to Abu Dhabi where you could decently track the potential damage and who would support it. Asset price dislocation is what makes markets grown and evolve, but someone always “loses an eye.”
Although it took decades, Japan has emerged anew and has many exciting developments especially in the smaller market capitalization asset classes. It is clear that investors are looking across the waters to areas not attractive until maybe now.