A price/earnings ratio of 56 is simply way too high when a major US index has 13 or 14. A dividend yield of less than 0.5 per cent compared to the world average of roughly 3 per cent told the investors the same story: the Nikkei was overpriced by a factor of four to six.
I am no fan of blindly following P/Es and yields, but sometimes it pays off well. Especially in the rare, but important cases of anomalously high or low values of the two indicators.
The good question to ask is "why the hell did it happen?" The answer is as follows:
According to the above mentioned LA Times article:
Japanese banks have been allowed to maintain lower amounts of capital, compared to their assets, which affected their rankings in the capital category. The Japanese institutions, however, are currently raising capital in preparation for new worldwide requirements due to be implemented in 1992 by the Bank for International Settlements in Basle, Switzerland.
U.S. bankers maintain that their growth has been hampered by federal and state laws that prohibit nationwide banking and restrict the types of businesses that banks can enter. But some of those laws are to be dismantled, and analysts anticipate that the U.S. institutions will eventually begin to move up again.
So. Japanese banks were allowed to expand, which ended up in a distaster. The US banks, when given more room to expand years later, engineered the infamous subprime lending spree. Only the relatively small size of the US banking sector made the crisis manageable.
The takeaway for countries that wish to keep their financial systems stable: Keep the banker leash short, but not tight.