I think I'm turning Japanese..
Directly from Wikipedia's entry on the Japanese asset price bubble
In the decades following World War II, Japan implemented stringent tariffs and policies to encourage people to save their income. With more money in banks, loans and credit became easier to obtain, and with Japan running large trade surpluses, the yen appreciated against foreign currencies. This allowed local companies to invest in capital resources much more easily than their competitors overseas, which reduced the price of Japanese-made goods and widened the trade surplus further. And, with the yen appreciating, financial assets became very lucrative.
With so much money readily available for investment, speculation was inevitable, particularly in the Tokyo Stock Exchange and the real estate market. The Nikkei stock index hit its all-time high on December 29, 1989 when it reached an intra-day high of 38,957.44 before closing at 38,915.87. Additionally, banks granted increasingly risky loans.
Prices were highest in Tokyo's Ginza district in 1989, with choice properties fetching over 100 million yen ($1 million US dollars) per square meter ($139,000 per square foot).[citation needed] Prices were only marginally less in other large business districts of Tokyo. By 2004, prime "A" property in Tokyo's financial districts had slumped to less than 1 percent of its peak, and Tokyo's residential homes were less than a tenth of of their peak, but still managed to be listed as the most expensive in the world until being surpassed in the late 2000s by Moscow and other upstarts. Tens of trillions of dollars worth were wiped out with the combined collapse of the Tokyo stock and real estate markets. Only in 2007 had property prices begun to rise, however it began to fall in late 2008 due to the financial crisis.
With the economy driven by its high rates of reinvestment, this crash hit particularly hard. Investments were increasingly directed out of the country, and manufacturing firms lost some degree of their technological edge. As Japanese products became less competitive overseas, the low consumption rate began to bear on the economy, causing a deflationary spiral. The Japanese Central Bank set interest rates at approximately absolute zero. When that failed to stop deflation some economists, such as Paul Krugman, and some Japanese politicians, advocated inflation targeting.[1]
The easily obtainable credit that had helped create and engorge the real estate bubble continued to be a problem for several years to come, and as late as 1997, banks were still making loans that had a low probability of being repaid. Loan Officers and Investment staff had a hard time finding anything to invest in that would return a profit. They would sometimes resort to depositing their block of investment cash, as ordinary deposits, in a competing bank, which would bring howls of complaint from that bank's Loan Officers and Investment staff. Correcting the credit problem became even more difficult as the government began to subsidize failing banks and businesses, creating many so-called "zombie businesses". Eventually a carry trade developed in which money was borrowed from Japan, invested for returns elsewhere and then the Japanese were paid back, with a nice profit for the trader.
The time after the bubble's collapse (崩壊 hōkai?), which occurred gradually rather than catastrophically, is known as the "lost decade or end of the century" (失われた10年 ushinawareta jūnen?) in Japan. In October 2008 the Nikkei 225 stock index reached a 26-year low of 6994.90.
This article is terrifying because it feels like the U.S is on the exact same path. There is a silver lining though - the U.S of 2008 and Japan of 1980's have several MAJOR differences.
1.) The source of cheap money and why I think deflation won't be as big of a problem for us.
The sources of liquidity are completely different. Japan's came from a obscenely high savings rate of it's people and the U.S came from policies handed down from the hill. In both cases investors were convinced that their high yield investments were risk proof - both believed that house prices could never fall and for some insane reason no one looked at the OBVIOUS bubble that was forming in the housing market.
Now we're at the after math and at this point Japan went through a deflationary spiral. Deflation is not good and is usually caused by the massive destruction of wealth (most people lump credit into there too). In Japan it was the combination of the destruction of wealth via the collapse of the stock market and the collapse of the housing market coupled with people hoarding their money. So far, in the U.S, we've seen the first two - and I think the administration is desperately trying to avoid the third. If consumer spending goes down then the lifeblood of our economy (money) stops flowing and we're well on our way to our lost decades. I think that getting U.S consumers to spend won't be a problem though.
2.) The yen was never a reserve currency, the U.S dollar is the world's reserve currency (for now). Thank god for world war II eh? Destroyed Europe and the only manufacturing country left on the Earth was the U.S! Through this period the U.S was able to establish its own fiat currency as the de-facto standard. For a long while the U.S dollar was considered more valuable than gold, and so everyone held U.S treasury bonds/notes. This gives the U.S tons and tons of ammunition to fight the deflationary spiral. Look at treasury yields today, the 3 month notes are at pretty much 0%. A 10 year treasurey bond (last I checked) is at 2.12% or so. That's REALLY low. What does this mean? The U.S can borrow tons and tons of money very cheaply. And the U.S is trying to help cushion the destruction of wealth experienced by the housing market before it spreads too far. The collapse of the housing market already dealt a near lethal blow to the financial market and if something isn't done soon this cancer will spread to every part of our economy. The U.S Govt is trying to prevent that by keeping the financial infrastructure from collapsing (by basically injecting tons and tons of cash into the system).
Unfortunately the fat cats on Wall-street are still giving themselves multi-million dollar bonuses...kind of discouraging when you think about it. Wallstreet makes profits on the way up...and makes profits on the way down (on the backs of the tax payers).
3.)Japan doesn't have a millitary, the U.S still has the world's most powerful millitary. If you have a big enough gun, you probably won't have to use it.
My highly speculative guess of how things go from here?
Financials will continue to have a nasty year until at least March. I'm mixed on whether or not the govt should just nationalize these morons - mainly because I think the govt would do an even worse job. For sure more regulations need to be put in place, what happened in 2008 was proof absolute that money flows way too fast for the free market to self correct anymore.
Housing market will continue to be depressed. Unfortunately this is the root of the problem but I doubt that saving the housing market will stop the dominoe effect anymore. At the same time housing prices NEEDED to deflate, if they were propped up we would've only delayed the collapse (and the collapse would've been much worse since even MORE people would've owned over inflated houses). Also bailouts to those who are about to foreclose do NOT need to happen. This sends the WRONG message to the American people - if you can't afford a home don't buy it!
In short the housing market will continue to be depressed until the rest of the economy recovers. People can't afford to buy homes if wealth is continually being destroyed and jobs are constantly being cut.
When will the stock market recover? I really have no idea on this one, historically I'd say no later than 2011 - with a good chance of a late 2009 recovery.
Look at the Dow Jones Index, once that index crests 11,000 then I think we're officially out of THIS recession (then expect another plummet 6-8 months later, then the real recovery can begin).
If the Dow Jones goes below 7k however...get ready because this recession has a chance to turn into a depression.