In Tokyo, they still talk about it as “the lost decade”.

It was the long slump in Japan after the greatest asset bubble in history burst in 1989, leading to a financial crisis that was prolonged and made deeper by the government’s failure to act.

The Tokyo stock and real-estate markets collapsed. Deflation set in. In despair, the Bank of Japan cut interest rates to zero. People hoarded money as the post-war jobs for life in Japanese corporations disappeared.

No wonder the country’s policymakers and investors are looking anxiously across the Pacific. “In Japan the problem was delay. The US response is much faster,” said Azuma Ohno, vice-president for equity research at Credit Suisse Securities in Tokyo. “But this crisis is more difficult because of high leverage and the expansion of securitisation and derivatives,” he said.

Japanese commentators have given US Treasury secretary Hank Paulson and Federal Reserve chairman Ben Bernanke top marks for speed. But there is concern over whether the bailout plan will work.

“We have to ready ourselves against the storm from the US and other countries,” warned the leading business newspaper, the Nihon Keizai Shimbun. “We must prevent chaos in Japan’s financial markets. We must guard so that the dollar interbank market, which is virtually paralysed, will not affect the yen market.”

Perhaps the most controversial figure in Japan’s delayed recovery from its own financial crisis was the governor of the Bank of Japan, Maseru Hayami. He took over at the central bank in 1998 and refused all pleas to loosen monetary policy.

Hayami was an anti-inflationary hawk with an almost religious belief in sound money. His apologists later said he had forced politicians to restructure and liberalise the economy. But his critics say he made Japan’s misery more prolonged and acute.

The duration of the slump also destroyed public confidence in the bureaucratic elite that had, in effect, run the economy behind closed doors since the end of the second world war.

“The most important lesson from the lost decade is never let amateurs who just attended faculties of law manage economic policies,” wrote author Nobuo Ikeda.

Japan lacked strong political leadership, too. Its coalitions established a consensus only on vast spending plans that increased the public debt, favoured construction firms tied to the ruling party and produced little sustainable growth. Eventually the giant banks were recapitalised and some merged, but the process was painfully slow.

Memories of the lost decade are all around in Tokyo. So is its legacy. Climbing the steps of Tokyo station at night, travellers meet a legion of the homeless making their beds out of cardboard and plastic sheeting.

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