There was a period of spectacular real estate price increase in Japan starting around the mid- 1970s. Commercial property prices in Tokyo recorded a threefold increase between 1980 and 1990. This increased the value of collateral and also induced a further extension of credit in Japan. Banks, who were confident about the trend of increasing prices would continue into the future, did not put in place serious credit assessment procedures. As a result, direct lending to property and construction reached nearly 15% of the total amount of balance sheet totals of banks in 1991, while ten years earlier it was 9%. This direct exposure was reinforced by an indirect exposure through the subsidiary companies of banks, which were set up in the 1970s to conduct mortgage credit activities deemed too risky for banks.

Because of real-estate prices collapsing in the early 1990s, leaving banks with a mountain of worthless property-related loans, banks have been postponing write-offs in hopes that an upturn in the economy or in land prices will reduce losses. Japan economy carried dual burden of a decline in consumption linked to asset deflation and a credit crunch linked to the weakened banking system's inability to lend.

A 1991 survey of Ministry Finance showed that 63 percent of banks' and subsidiaries' loans were secured by real estate and 41 percent of total loans were to real estate and the construction industry. Japanese banks faced an unprecedented increase in non-performing loans following five years of rapid growth in their real estate exposure from 7 percent to 17 percent of total loans between 1986 and 1990. The amount of non-performing loans is 20 percent of GDP in Japan. At the end of 1992 bad loans, i.e. non-performing loans and restructured loans, reached 40 percent of banks capital sheets. Real estate prices depreciated by 24 percent from 1990 to 1992, thus collateral did not provide an effective cushion against those developments.

The Asian loan problem is massive: Japan, Korea, Thailand, Indonesia, Malaysia and the Philippines are all suffering from banking systems buried in non-performing loans. Non-performing loans account for 40 percent of South Korea's gross domestic product (GDP) and in Thailand and Indonesia, more than 70 percent of GDP is disabled by bad loans. To look at it from another perspective: at the height of the U.S. savings-and-loan crisis, non-performing loans accounted for just 7 percent of GDP. Hong Kong and Taiwan have a different problem: rapidly declining real estate values and rents.

Real estate-wise China appears to be going in the same direction. The city of Pudong may have as much speculative real estate under way as all of Thailand. Taking into account other bigger Chinese cities, the oversupply of real estate is countless. Once again, the supply of loans is provided by Chinese state-owned banks. If recession hits and these assets are eventually resolved at large discounts to replacement costs, Chinese banks will have to take a major strike.