Feb 18, 2013

Jim Grant on Japan's bull-market system of the late 1980s

More than a bull market, Japan invented what enthusiasts believed was a perpetual bull-market system.  Japanese companies bought each others’stocks, and Japanese banks bought their clients’ stocks. These “cross holdings,” so the argument went, would never be sold, so the shares that did remain outstanding were all the more valuable. The most expansive element of the bull-market system was that banks were able to count a percentage of their stocks as a contribution to their own capital.  Thus, as the stock market rose, so did the banks' capital and so did their lending capacity.  The more the banks lent, the greater the prosperity in the markets in which the loans were spent.

~ James Grant, The Trouble With Prosperity, p. 155

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