Japan’s return from financial oblivion

The financial carnage of the past fortnight may seem like a once-in-a-lifetime nightmare for most Americans and Brits, but for the Japanese it has eerie parallels with their own gigantic bubble of the late 1980s, the inevitable crash, and the slow upward path to recovery. Cheap money and lax regulation fed an unsustainable property boom: at the height of the bubble, Japanese would tell you the land of the Imperial Palace in central Tokyo was "worth" more than the state of California.

Japanese bankers and investors who snapped up Manhattan skyscrapers, Hollywood studios, Pacific resorts and countless hotels and golf courses were no strangers to excess. Gold leaf topped the dishes at fashionable nightclubs. Japanese bidding pushed prices of Impressionist and Picasso paintings to world records.

One Japanese industrialist, Ryoei Saito, stunned the art world not once but twice, first by paying world records for a Van Gogh and Renoir, and then announcing that he wished to be buried with the paintings.

When boom tuned to bust, credit dried up as Japanese banks hoarded cash, and recriminations duly followed over who was to blame, be it greedy and irresponsible bankers, or lax and complicit regulators. Japanese newspapers and politicians fumed over rewarding private failure with public money; and there were plenty of spectacular bankruptcies, bank nationalisations and shotgun mergers.

The good news is that after what Japanese call ushinawareta junen, or the 'lost decade' of the 1990s, the world's second-biggest economy is now firmly back on its feet. In Tokyo, clusters of new skyscrapers have sprung up like mushrooms from dead wood. There are new department stores, new luxury hotels, and new underground lines.  

Arriving at Tokyo Station, where high-speed shinkansen trains fan out across the archipelago, I could hardly move in the vast subterranean concourse for the crush of shoppers. In fact, the only visible remnants of the 'lost decade' are well-tended hamlets of homeless people in Tokyo's public parks. Some have their own vegetable plots, and TV antennae protrude from tents.

Japanese banks are again flush with cash, and although they complain of insufficient lending opportunities at home, they can easily tap an ocean of liquidity. The Japanese are the world's biggest savers, with household assets of $15.4tr.

Kenichi Watanabe, the CEO of Nomura, Japan's top brokerage, has been bragging over the summer about his $5.6bn "war chest" for acquisitions, and how his phone never stops ringing with deal invites. This week he put a little of that money where his mouth is, snatching the Asian empire of Lehman Brothers for a reported rock-bottom $225m. Nomura is also bidding for Lehman's London-based European operations.

How did Japan do it?  The key was carefully crafted Darwinism. The weakest banks were nationalised before being sold off, or were simply left to die. The strongest were fattened with public money. The final bill for Japanese taxpayers was nearly $440bn, of which the government claims about 70 per cent had been paid back by the end of 2007.

The downside to Japan's recovery is that it took so long to get here. Denial and cover-up, and an initial unwillingness to pull the plug on corporate zombies for fear of triggering mass unemployment and political unrest, stalled the clean-up for years. Japan finally has a flexible labour market, but the progress has been agonising. Ask Tokyo office workers what they miss most and the answer is job security.

Japan's protracted struggle is something the US wants to avoid at all costs. But neither Obama nor McCain will be able to avoid sharing the stigma of Japan's public debt, which has ballooned to Italian levels. What the US most lacks is Japan's thrifty savers, and its unassailable lead in key industries. After Wall St, it will soon be the turn of Detroit to seek a bail-out from US taxpayers. When it happens, don't forget it was Japanese carmakers, led by Toyota and Honda, who reduced US firms to begging. ·