The Ultimate Bubble
And you thought 2008 was bad
The Japanese stock market has been getting great press this year. CNN proclaims, “Japan’s long-suffering stock market is back.” The Financial Times says, “Tide turns finally for Japanese stocks”. People from around the world are joining in the latest irrational exuberance. Even the Oracle of Omaha himself, Warren Buffet, is buying Japanese stock. But it isn’t all roses. There is also a slew of articles cautioning would-be gold seekers that the boom may not last. The Economist says, “Japan’s stockmarket rally may disappoint investors”. What drew my attention, however, is not the headline, but this chart from The Economist article:
I knew the Japanese stock market went through a large bubble in the 1980s, but I’d never dug into the numbers. They are so insane I had to double-check to be sure the swings were as large as the graph indicates. Japan has seen a stock market out of a fever dream that turns into a nightmare. No other economic boom and bust cycle in the modern age comes close.
How crazy is it? Take a simple hypothetical. Let’s say you are a twenty-something living in Japan in 1950, and decided to invest in the local stock market. You put the Yen equivalent of 1,000 dollars into an index fund that mirrors the Nikkei 225 index of stocks (I know index funds didn’t exist in 1950, but humor me). This is not day trading - the plan is to keep this money in the stock market until you retire in 1989.
Let’s hope you have tenacity because the next four decades are going to be a wild ride. In 1952 alone, the stock market doubled in value! But there are also some bad years. In 1957, the market decreased by over 13 percent. From 1973-1975 your investment would have lost over a quarter of its value. Over the long run, however, the Nikkei grew at a fast pace. That $1,000 investment is growing to be a decent-sized nest egg. Things are looking good for a 1989 retirement.
Then come the 1980s. The Japanese stock market goes ballistic. In 1983 the stock market goes up 23 percent. In 1986 it increases by 43 percent. Your investment doubles, and then doubles again. People are legitimately saying that it's a question of when, not if, the Japanese economy passes the US economy to be the largest in the world. Japan appears to have unlocked some secret formula to economic success. After all, this isn’t a short-term thing. The stock market has increased for 12 years in a row and appears to still be accelerating.
You retire at the end of 1989, and that $1,000 from 1950 is now worth an astonishing $389,000. You cash out and buy a nice retirement property on the beach. Life is good. Japan is heading in the right direction and will soon be the most prosperous economy in the history of the world. Japanese companies are buying up foreign competitors right and left. The world is buying Japanese cars, electronics, and anything else that is stamped “Made in Japan”.
December 1989 was the peak. Then came the downfall. How bad was it? Well if instead of investing in 1950 and withdrawing in 1989, what if you invested $1,000 in 1989? Then it's going to be bad news on top of bad news. By 1998, that $1,000 is only worth $331. That’s the bottom, and it’s so low you’d have to go back to 1966 to reach the equivalent. Not only that, but the stock market never fully recovers. Even now, that $1,000 invested in 1989 would only be worth $840 today! After 34 years, the investment would still be underwater. Absolutely terrible for anyone who started investing in the early 70s.
To repeat: if you invested $1,000 in the Japanese stock market in 1950, by 1989 it would have been worth $389,000. If you invested $1,000 in the Japanese stock market in 1989, today it would be worth $840. This was originally called Japan’s “lost decade”, a term that needs updating as it now stretches closer to a half-century. Just compare the chart above to that of the American S&P 500:
There are some up and downs, especially for those that invested at the height of the dot-com bubble in 2000, but there has never been a sustained 30 year trough.
This aligns with what I saw in Japan when I traveled the country for two weeks in 2019. I did my best to see a lot of Japan, not just the highlights. Along with the mainstays of Tokyo, Kyoto, and Osaka, I also visited Kanazawa, Hiroshima, Nagasaki, and Fukuoka. Before traveling to Japan, I had heard all the normal accolades. “There’s no trash in the streets!”, “The people are so polite!”, “The food is amazing!”, and “It's like visiting the future!” While the first three are true, I largely disagreed with the fourth.
Brief aside: I had always heard that there isn’t any trash in the streets of Japan, and that’s true. You’ll hardly ever see a McDonald’s wrapper or cigarette butt or empty water bottle laying in the gutter. What amazed me even more, though, is that there are also very few public trash cans in Japan. I had assumed frequent trash cans were why there was no trash, but they were nowhere to be found. Instead of providing trash cans for people to throw out their garbage, the Japanese have come up with the revolutionary concept of taking care of your own trash. Walking down the street with an empty coffee cup? You’re going to have to hold on to it until you reach a private business or residence because there isn’t going to be a trash can on the corner. You are responsible for your waste.
I don’t think this could work in any other country, but it’s a sight to behold in Japan.
Instead of visiting the future, Japan felt like visiting what someone in 1989 would imagine the future would be. Things seemed, well, kind of run down. The lack of trash in the streets was nice, but a lot of buildings in downtown areas were past their prime. Outside of parts of Tokyo, there wasn’t a lot of new construction. It is a place that is, in some ways, frozen in the 1980s. Those expecting a lot of glittering new buildings will have better luck in Shanghai or Seoul. I want to emphasize that overall Japan is a fantastic place to visit, but its reputation is partly based on Japan in its heyday, not the Japan of today.
34 years of an underwater stock market will do that.
A brief comment on the trash can point: you’re technically right that there are no trash cans and that you have to wait until you reach a business or residence before you discard your trash. In reality, there are 7/11s, Lawsons, and Family Marts every two minutes in a major city, and basically everyone happily pops in and discards their trash - nobody is holding onto a coffee shop for an hour due to a lack of trash cans!
Correct me if I'm wrong, but I read somewhere that without Tokyo and Osaka, Japan's per-capita GDP resembles Romania's. Which would certainly match my experience living in the Japanese countryside for two years.