2  BIS Review 50/2009  In the early stage of the bubble bursting, it took us quite a while to understand how serious its negative impact on the economy would be. We optimistically thought Japan’s economy would pick up once cyclical corrections in business investment had run their course.
This initial optimism was proved wrong by the subsequent deterioration in the downward spiral between the financial system and the real economy. The US is no exception in this regard. Policymakers often say “bubbles cannot be detected until they burst”. But more accurately, we should say “bubbles cannot be readily identified even after they burst”.