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It’s been a long wait. Last Thursday, Japanese stocks finally surpassed their previous high, reached more than 34 years ago.
The Nikkei 225 stock index closed at 39,098.68, down from 38,915.87 on December 29, 1989. It is probably the longest decline in stock prices in any major market in history. The Dow Jones did not recover from its peak in September 1929 until November 1954, that is, 25 years. The FTSE 100 index has performed depressingly poorly, but managed to return to its late 1999 high of 6,930 in February 2015.
So what should we learn from Japan’s experience, particularly in light of the current rise of the AI-inspired market by American technology companies?
The most basic point is that there is a fine line between “animal spirits” and “irrational exuberance.”
The first is the human condition famously described by John Maynard Keynes, where instinct and emotion come to dominate economic behavior. The second is the title of a fantastic book by the American economist Robert J. Shiller – published, as it turns out, at the height of the US market in March 2000 – in which investors become excessively optimistic and think that stocks will continue to rise much further. of any rational reasoning. justification. Animal spirits can be positive, helping to drive economic growth, while irrational exuberance always ends in tears.
Long wait: the Nikkei 225 index closed at 39,098.68, compared to 38,915.87 reached on December 29, 1989.
What happened in Japan in the late 1980s was beyond reason. The long economic boom had given rise to an extraordinary asset bubble.
At one point, the Tokyo Imperial Palace land was valued at more than all of California.
Japanese companies seized American trophy assets. Sony acquired Columbia Pictures. Mitsubishi bought control of Rockefeller Plaza. Japanese investors also helped prop up U.S. stocks after the stock crash on Black Monday in October 1987. By chance, a few days later, I was in Tokyo, at the offices of Yasuda Fire and Marine, the insurance company who had recently purchased, somewhat controversially, The Most Expensive Work of Art in the World, Vincent van Gogh’s Sunflowers.
While we were looking at it, the chief investment officer was suddenly called. When he returned, he was radiant. He explained that what was at stake was the Ministry of Finance. They and other institutional investors had been “guided” by the Treasury to accumulate money in US stocks. “Japan,” he said, “will save America.”
As it turned out, American stocks recovered and the boom in Japan lasted for another two years. However, there was a global recession in the early 1990s and that depressed asset prices everywhere. The Ministry of Finance attempted to stem any decline in Japan by getting institutional investors to buy shares. Ultimately that failed and the Nikkei bottomed out in 2009. Not only did the Japanese market have to fall the most, but the decline lasted longer than anywhere else.
Looking back, the euphoria of the late 1980s seems absurd. However, at the time there were solid reasons behind it. Japan was the fastest growing developed economy in the world and its giant companies, Toyota, Sony, etc., dominated its markets. However, in addition to her work ethic and technical excellence, she was also helped by demographics. In the 1960s and 1970s it had a young population: many people of working age and relatively few retirees. Now it’s the other way around.
In reality, given the headwinds, the economy hasn’t fared that badly over the past 30 years. It has provided its people with a safe and healthy lifestyle, and they are among the oldest in the world. But it has taken a while for the strengths of their giant companies to be recognized and drive their stock recovery.
Is the current state of the US markets similar to that of Japan in the 1980s? To some extent, of course. They are certainly being driven by animal spirits.
But there is no such thing as excessive self-confidence. Market values ​​may be frothy, but not yet irrationally so. As for the United Kingdom, I think we are in the same situation as Japan 10 or 15 years ago, when it was fashionable to speak badly of the country. That will change. I hope we don’t see irrational exuberance, but we could use a little less irrational depression.
But the immediate object lesson from Japan is that moods can change quickly. The S&P 500 has done well and is up 27 percent from a year ago. But the Nikkei is up 42 percent. A similar revaluation will occur here over time. Just don’t ask me when.