Matthew Lynn marks the 20th anniversary of the peak of the Nikkei and asks whether we’ve learned any lessons
Twenty years ago this month, as we’ve been reminded by countless documentaries, the Berlin Wall was coming down. Eastern Europe was convulsed by the revolutions from which communism never recovered. But much further east, something else was happening which arguably has had just as profound an impact on how the global economy has developed since then. The rampant bull market in Japanese equities was heading for its final, frenzied peak.
For stockmarket historians, 29 December 1989 will always be a key date. On that day, the benchmark Japanese index, the Nikkei 225 which includes companies such as Honda, Nissan and Sony, hit its all-time peak of 38957, having quadrupled in value from 1985. When the markets re-opened for the first trading day of the 1990s, it started falling. And falling, and falling, and falling.
And give or take a few blips, it has been falling relentlessly ever since. Over the next two and half years, the Nikkei fell by 63 per cent. But that was far from the end of it. In March this year, amid global financial panic, it touched a fresh low of just over 7000. Today, as the anniversary nears, it has managed only to claw its way back to 9500, a quarter of its level two decades ago.
Nor is this sad story only about stocks. In the 1980s, the Japanese property market went even crazier, reaching levels that might have made a Foxtons salesman blush. That market carried on rising even as stocks slid: in 1991, an alarming calculation found that the value of Japan’s land was about $18 trillion, or four times the value of all the land in the United States, even though Japan is only about the size of California. Since then, Japanese property prices have plunged as calamitously as stocks, and today they remain about 60 per cent below their 1991 levels.
It was, and remains, the Mariana Trench of bear markets. And it has come to dominate the thinking of investors and policy-makers the world over. Like all bubbles, there was some substance to the Japanese boom of the 1980s. Japan’s economy was on an export-driven roll. Its car and electronics manufacturers were flattening the old giants of American and European industry. Take any product you can think of: the Japanese version was more reliable, better designed and cheaper. Management theorists flocked to see the lean and flawless factories of Osaka and Nagoya; futurologists predicted that pretty soon we would all be eating sushi and learning kanji.
The trouble was that, as in every other bubble, the truth became stretched to absurdity. There was a limit to how many Sony Walkmans we wanted to buy, no matter how good they were. And in a free market, European and American car makers were always going to smarten up their act to compete with Toyota and Nissan. The bubble was always going to pop one day. What no one quite foresaw was how spectacularly, or with what calamitous consequences.
Twenty years later, what are the implications of that crash? For investors, there are plenty, even if the lessons are all dismal. The Nikkei crash blows just about every investment cliché out of the water. Buy and hold? You wouldn’t want to have bought and held this market. Buy after the crash? Well, not really. If you bought the Nikkei in 1992 or 1993, you’d still be out of pocket. Stocks always perform in the long-term? As Richard Northedge argues on page 36, that one’s hard to defend against recent experience too. Maybe the Nikkei will recover one day, but it may be your grandchildren who see it back at 40000.
More significant, however, is the influence of the Nikkei crash on policy-makers. We hear a lot about how central bankers are trying to avoid the mistakes of the 1930s. But so much has changed since before the second world war that few lessons from that era are directly relevant to today. What central bankers are really trying to do is avoid the mistakes of the Bank of Japan in the 1990s.
Initially, Japan’s monetary authorities didn’t think they had much to worry about. Stocks were down, but they looked pricy anyway. The Japanese carried on raising interest rates until August 1990, long after the Nikkei collapsed. It was only once it became clear that growth had evaporated — having averaged around 5 per cent annually in the 1980s — that they started to take action. Rates were cut from 6 per cent in 1991 to 1.75 per cent in 1993. And the government started to pump money into the economy: a budget surplus of 1.3 per cent of GDP in 1990 became a deficit of 5 per cent by 1995.
The trouble was, none of this seemed to work. The economy spluttered a bit every time it was stimulated, then stalled again. As the slump stretched into its second decade, the Bank of Japan tried something new. Because it couldn’t cut interest rates any further it started printing money by the device that came to be called ‘quantitative easing’. In effect, Japan’s response to the Nikkei’s collapse was an economic laboratory for how the rest of the world should cope with financial shocks. All we’re doing now is what they did a few years ago. There’s only one snag: none of the prescriptions actually cured the sickness.
For the world’s leading central bankers today, the lesson has been that Japan didn’t act quickly enough or aggressively enough. ‘Monetary and fiscal policy should have become even more aggressive in an effort to prevent a deflationary slump,’ argued a key paper on the Japanese experience published by the US Federal Reserve. And that has been the intellectual rationale for the speed and aggression with which the Fed, the Bank of England and other central banks have both cut rates and printed money in the past year.
But there is an alternative explanation. Just as plausibly, the Japanese propped up their banking system too long: its half-dead, zombie banks acted as a drag on the economy and allowed too many bankrupt companies to stagger into the financial twilight zone with them. And so much government debt was amassed that it crowded out the private sector and left the country fundamentally insolvent. By printing money like crazy, Japan fuelled bubbles in other countries — as hedge funds and others borrowed cheap yen while Japan itself stagnated. And that’s how a short, nasty slump was turned into a long, catastrophic one.
Rather worryingly, we are doing very similar things. Our banks are bailed out and propped up, but still refuse to lend. And we’ve become even more indebted: in the three years after the Japanese bust, public debt rose by 140 per cent, but ours is already up by 170 per cent since 2007, including the cost of bank bail-outs. And our own quantitative easing has puffed up asset prices but done nothing to kickstart the real economy.
Central bankers and policy-makers on both sides of the Atlantic think they have learned the lessons of the Nikkei’s collapse and the economic stagnation that followed, and claim to be determined to avoid Japan’s mistakes. But it is possible they are repeating them — and on an accelerated timetable. In which case, rather disappointingly, some time around 2030 we’ll be looking back and wondering how the slump that followed the credit crunch managed to last two whole decades.
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