Tokyo - As the world is dragged into a financial crisis ignited by the US subprime loan problem, economists are reminded of the banking crisis that hit Japan, beginning in the late 1980s, triggered by the burst of the country's real estate bubble.

But analysts in Japan remain optimistic about the US situation, saying that the US may not have to repeat Japan's suffering if it acts swiftly and appropriately.

The United States is passing through a similar period as Japan did 20 years ago, they said. Back then, Japan's asset-inflated economy collapsed, balance sheets turned unstable, and it became difficult for the financial system to recover without public funding.

After real estate and stock prices inflated, Japan's economic bubble began to burst in the late 1980s, and stock prices did not bottom out until 2003. Burdened with bad loans, Japanese banks withdrew from the international market.

Lessons have been learned from Japan's experiences, however, and the US government has a chance to recover before long because of some major differences.

"One key difference is that the US is reacting much, much faster," said Martin Schulz, senior economist at Fujitsu Research Institute.

Schulz said this is because the US government knows the situation can get worse and it might see a financial meltdown if it waits too long.

It took more than 10 years for Japan's financial institutions to solve the problems and for the government to acknowledge the crisis as the banking sector tried to hide its non-performing loans, leading Japan into a decade of stagnation, with an average growth of less than 1 per cent annually.

"The scale of the non-performing loans stayed undetected for a long time in Japan because the financial institutions tried to avoid taking responsibility," Toshihiko Kiuchi, senior economist of the Nomura Securities, told Deutsche Presse-Agentur dpa.

Because the Japanese banks tried to hide their non-performing loans, the problem was not detected for a long time. When the scale of the problem finally emerged, it was already very serious.

After the real estate bubble burst, the Japanese government finally began injecting a large amount of liquidity into the banking sector in 1998.

The sector underwent a drastic restructuring and recapitalization process. Only four banks were left after 12 big banks merged.

In the US financial crisis, the main problem was the initial drop of securities' prices, but it was easier to measure the magnitude of the problem, Kiuchi said.

As the extent of the crisis was recognized, the US government began taking action within a year since the subprime mortgage meltdown last summer.

Schulz pointed out that the US government has also been more honest than the Japanese government in explaining to its people the scale of the problem.

The US government's rescue package, however, is not comprehensive because it focuses only on buying bad assets, Schulz said.

The banking sector needs to have sufficient funds to regain optimism and become solvent so that they can go back to business, analysts said.

A clean-up of the banking system was an important part of Japan's comeback. Banks merged during a recapitalization process and grew bigger and stronger.

While foreign banks that came to rescue their failing Japanese counterparts were not welcome, this remedy would work in the United States, the world's biggest financial market, Schulz said.

Now that Japanese banks have rid themselves of bad loans, they are set to to rescue their American counterparts.

For instance, Japan's biggest lender, Mitsubishi UFJ Financial Group Inc, reached an agreement with struggling Morgan Stanley Monday to acquire a 21-per-cent stake in the second-largest US brokerage.

It would be more complicated to implement but it would be more effective to recapitalize the banking sector, Schulz said.

To stabilize the financial sector and hope that the real economy would stabilize itself would be a much smarter and less costly approach, the analyst said.

If it wants to escape from Japan-like doldrums, the US government needs to establish a complete system to inject public funds, to buy out bad loans and to take care of bank failures, Kuichi said. (dpa)