The Asian Crisis (1997)

International stocks took a 60% hit, currencies in the region fell double digits with some hitting almost 40% and the IMF and the World Bank had to bail out much of the region.

Intrigue in the Far East
The Asian Crisis and resulting crash actually had roots in the crash of the Japanese market. The Japanese economy gained extreme strength after its long recovery from the war and the atomic bombs. By coupling with the other emerging southeast Asian economies to form an unstoppable economic force, Japan seemed to create a flawless realization of Keiretsu. The phrase Japan Inc. was coined to describe how Japanese economy, business, and government were intertwined. Businesses from all over the world were sending representatives to try and find out how Japan was gaining its success. Soon, the Asian economy became an alternative for investors who were recently bruised by 1987.

Between 1955 and 1990, land prices in Japan appreciated by 70 times and stocks increased 100 times over. Trading became the national sport, and the Japanese jumped into the market with more blind confidence than that of the Americans of the 1920s. During the eighties, large Tokyo firms were worth more individually than all their American counterparts combined, and Japanese golf courses were worth more than the value of all the stocks on the Australian exchange.

Japan’s Bust
Investors may have realized Japan was becoming a bubble, but it was believed that the high level of collusion between the government and business could sustain the growth forever. But an inverted growth cycle perpetuated itself when landowning firms started using the book value of their land to buy stocks that they in turn used to finance the purchase of American assets (Rockefeller Center was 80% owned by Mitsubishi Estate Company at one point). Like the prosperity of the Roman Empire, the prosperity of Japan proved to be its undoing as corruption began to spread throughout the political and business realms.

The government sought to excise the tumor and put a halt to the inflammatory growth of stocks and real estate by raising interest rates. Regrettably, this didn’t have the slow soothing effect on the market that the government hoped. Instead, it plunged the Nikkei index down more than 30 000 points. The bursting of the Asian bubble nearly took out the American economy as well, but the measures enacted after 1987 sopped the avalanche of program trading. We learned at least one lesson from all of these crashes: humans may overact frequently with small effects, but computers do it only once in a big way.

South Asia Loses Regional Stability
However, the crash did remove Japan as a center of financial stability and a heavy lender to other nations in Asia, particularly the ASEAN block. More importantly, much of the capital exiting Japan went into the ASEAN block, causing rapid appreciation of assets. Unfortunately without Japan’s bubble and with China also struggling, investors started changing their thesis that Asia was set for endless growth. Hedge funds and other contrarians took aim squarely at the currencies in the region that were operating using currency pegs. The last half of 1997 saw the Thai baht drop its peg and be hammered by short sellers – George Soros among them – followed by the Korean won. The IMF and the World Bank stepped in to cushion the blow, but the fear of contagion spread across the world and put global stocks into a slump.

The upside of the Asian Financial Crisis was that it helped national governments in the region take on reforms to stamp out the shady business that grew during the speculative bubble. This set Asia once again on the path to be a growth center of the world. Japan has never really recovered from its bubble (or at least the Nikkei hasn’t), but China, Korea and ASEAN have more than made up for the difference.