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Japan’s Long Bear Market

Ichiro Suzuki Japan’s Nikkei Index closed 2022 at 26,094, down from 28,791 a year earlier amid a global rout in the stock markets. Worse, it was still 33% lower than its all time high registered 33 years earlier, at the end of 1989. With the monstrous Japan Bubble having culminated at the very end of the 1980s, Japan’s stock and real estate markets got onto fierce downward trajectories as soon as the 1990s had kicked in. As it turned out, this downward movement proved to be a no ordinary bear market that hit investors every five to ten years due to a recession and/ or over-valuation. In 1992, Year 3 of the persistent descending trend, one began to wonder how long it would take for the Nikkei to reclaim its all time high of 38,915 witnessed on the final trading day of 1989. Hence, a history book was brought in. In the United States, near the end of the Roaring 20s, the Dow Jones Industrial Average peaked in September 1929 and then collapsed in a spectacular fashion, losing 90% of its peak value. It was not until 1952 when the DJIA rose to its new all time high. Thus, 23 years became a benchmark for the Nikkei. (Much later, at the turn of the 21st century, the Nasdaq rose to a stratospheric high amid the epic tech bubble, and then suffered a precipitous fall wiping out 80% of the peak value. This time, it took ‘only’ 15 years for the tech-heavy index to rose to a new all time high.) Japan’s long time bear market turned out to be far more persisting and hence more painful than any experience of corrections on Wall Street. To begin with, it eventually took the Nikkei 20 years to reach its bottom at last. It was not until the climactic moments of the 2007-09 global financial crisis. It turned out to be a far cry from reclaiming the past high in 23 years. No correction phase in the U.S., from peak to bottom, lasted full three years. The DJIA spent 34 months to lose 90% and the Nasdaq took 32 months on its 80% fall. Worse, having reached the ultimate low 20 years after the peak, the Nikkei spent another three years drifting near the bottom level. Only in the final two months of 2012, 23 years after the apex, the Nikkei started rising decisively, to confirm that it had left the bottom behind. For well over a century, the United States has shown its ability to reinvent itself every time its economy hit the wall. It has remained amazingly productive while innovating at the edge of economic growth. America has been advancing past the productivity frontier. Soft infrastructure that is built to run the economy has always made it possible to take itself to a new, next stage. For Japan on the other hand, the burst of the Japan Bubble brought an end of an era, putting a period on a economic growth model that had dazzling successes from the 1950s until the end of the 1980s. The model was based on exporting industrial goods, starting from textiles to cars and sophisticated electronics goods and semiconductors by the time the model’s effectiveness ran its course at last. As Japan was peaking out, the age of globalization began with the collapse of the Soviet Union and its communist satellites in central/ eastern Europe, and the rise of China. At the same time, the advent of the internet gave birth to a knowledge-based and software-driven economy. Japan had to cope with these monumental challenges, and fumbled. The country spent too much time to recapitalize the banking system crippled with bad debts. Japanese industries saddled with non-productive assets fiercely shrank their assets, in an attempt to boost liquidity at hand at a time when banks became unwilling to lend. Investments in research & developemt expenses were curtailed, sowing the seeds for Corporate Japan’s declining competitiveness that was already under way as the gate of the Information Age was opening. On top of it, Corporate Japan’s organizational system was effectively declared bankrupt when the practice of lifetime employment proved to have outlived its usefulness in a globalized world. With the fall of the wildly successful growth model, Japan has been in a mode of soul-searching for over a generation. It doesn’t require further debate to find what needs to be done. It is abundantly clear. Just do it, but it can’t be done. The past success was greatly based on the country’s culture, which can’t be denied and thrown away. So voters and politicians try to avoid radical changes in the system, going for gradual adjustments, still hoping for clinging to the old system as much as possible. While Japan has been changing in a way the country finds some comfort, the world is changing faster. This is why Japan is languishing at 33% below its peak seen 33 years earlier while the U.S. rose to a new all time high 23 years after the dizzying peak. About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.

 (This chart is courtesy of Financial Times)

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