With the current global financial crisis, there is much talk in the international economic communities about how to prevent the kind of prolonged slump that hit Japan after the end of the bubble economy years.

The period between roughly 1985 and 1990 was a time of unparalleled prosperity in Japan. But it was also a gilded age defined by opulence, corruption, extravagance and waste. When the bubble economy years ended, Japan entered a prolonged slump from which it has yet to fully recover.

When did the bubble economy begin and when did it end?

Economic historians usually date the beginning of the bubble economy in September 1985, when Japan and five other nations signed the Plaza Accord in New York. That agreement called for the depreciation of the dollar against the yen and was supposed to increase U.S. exports by making them cheaper.

But it also made it cheaper for Japanese companies to purchase foreign assets. And they went on an overseas buying spree, picking off properties like the Rockefeller Center in New York and golf courses in Hawaii and California.

By December 1989, the benchmark Nikkei 225 stock average had reached nearly 39,000. But beginning in 1990, the stock market began a downward spiral that saw it lose more than $2 trillion by December 1990, effectively ending the bubble era.

What was the cause of the bubble economy?

The dollar became cheaper just as Japan was reaching the height of its economic prowess in manufacturing and at a time when most Japanese had huge amounts of personal savings.

The Bank of Japan had lowered interest rates from 5 percent in 1985 to 2.5 percent by early 1987.

Japanese banks, which had previously lent mostly to corporations, now had ample funds to lend at a time when their major corporate customers were flush with cash thanks to their trade surpluses and the availability of worldwide equity markets, which competed directly with Japanese banks.

So the banks began freely lending to Japanese firms and individuals, who purchased real estate, which increased the paper value of land assets. This created a vicious cycle in which land was used as collateral to obtain further loans, which were then used to speculate on the stock market or to purchase more land. This drove up the paper value of land further, while the banks continued to grant loans based on the overvalued land as collateral.

There was little questioning by either the government or the banks themselves over how the loans would be repaid or what would happen once land values started dropping.

What was Japan like during those years?

For many people, it was one big, expensive party.

The frugality and austerity that defined the country during the postwar era gave way to extravagance and conspicuous consumption. Stories of housewives in Nara sipping $500 cups of coffee sprinkled with gold dust or businessmen spending tens of thousands of dollars in Tokyos flashy restaurants and nightclubs were legion.

One nightclub in particular, Juliannas Tokyo, become the symbol for the flashy, party lifestyle of the entire era.

Japans inflated land prices made global headlines.

The Imperial Palace was reported to be worth more than France. A 10,000 note dropped in Tokyos Ginza district was worth less than the tiny amount of ground it covered.

It was also a period of increased international travel, as Japanese went to the United States, Europe and Oceania in record numbers, shopping for Louis Vuitton and Gucci handbags, Seville Row and Armani suits, and the finest wines.

Trips were often made after dropping millions of yen at English conversation schools in posh buildings with fake Van Gogh paintings on the walls and fish tanks in the lobbies.

The bubble economy attracted Westerners by the planeload, who made fortunes at foreign banks and brokerages, or at least good money teaching English.

Changes in the immigration law in 1990 also allowed Brazilians of Japanese descent to settle in Japan and work in the factories that were facing a labor shortage as younger workers sought higher paying white-collar jobs in Tokyo or Osaka.

What happened after the party ended?

After the crash in late 1990, economic growth stalled and newspapers were filled with stories of businesses going bankrupt.

Corrupt deals involving the yakuza and senior executives at Japans largest, most venerable banks and brokerages came to light. Corporations essentially stopped investing and consumers curbed their spending. Housing loan corporations, known as jusen, started to go bankrupt, and then the larger banks were forced to merge to consolidate their mounting bad loans.

Various government-sponsored fiscal and economic stimulus measures, including trillions of yen in failed public works projects, did nothing to revive the economy. This led to what has been dubbed Japans lost decade, starting roughly in 1991, when the effects of the stock market crash became clear. The carnage lasted until around 2000 or 2001, after the banks had been bailed out with taxpayer funds, much corporate restructuring had taken place and the growth of the Chinese economy provided manufacturers some relief.

How is the bubble era seen today?

Nostalgically by those who remember when they had money to burn, with embarrassment by those who reflected on the attitudes and policies, or lack thereof, that led to it, and with anger by those who see the period as the moment in Japans history when the country abandoned its traditional moral, social, cultural values and became greedy in an allegedly Western or American sense.

Abroad, economists and bankers see the bubble era and its aftermath as a warning.

In the U.S. over the past few months, media and academic attention has focused on the bubble economy and how it compares with the current situation.

Much of the discussion is on how to avoid the mistakes Japan made that led to its lost decade. Economists in Japan and overseas agree the failure by the BOJ and the Finance Ministry to act quickly in the early 1990s, when it was clear the banks were in trouble, is a major reason for the lost decade.

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