To someone living in the industrialized world in 1979, devastating financial bubbles were like smallpox pandemics or famine—tragedies most knew only through history texts and newspaper stories about poor countries. The last one to hit the US was a full half-century ago, when America’s stock market crashed spectacularly. Bubbles in major industrial countries were rare. Japan had never experienced a single one, ever. That made it harder to grasp what happened next.
First, in the mid-1980s, Japanese real estate values started soaring. As someone famously calculated, by 1990, the market value of the plot of ground beneath Tokyo’s Imperial Palace surpassed that of the entire state of California. Stock prices boomed too. When the Nikkei 225 index hit its all-time peak on December 29, 1989, its market capitalization was six times what it had been just a decade earlier.
Then came the pop. Fearing inflation, Japan’s central bank had started raising rates in mid-1989, and in the early months of 1990, the effects began to hit. As credit dried up, investors dumped stocks to cover interest on loans. By October 1990, the Nikkei had plunged 48%, erasing $3 trillion in wealth.
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