Everybody always says that the most important thing in investing (and in most other things), is to always think long-term. If you hold onto your stocks, assets, or anything else for long enough, it will eventually weather any storm. This is almost always, the case. Almost. Although it works with basically any aspect of the market, there is one big exception to this rule – Japan.
After the 2nd world war, Japanese economy was in shambles. They have lost around 2 milion people, and billions of dollars in their war efforts. And that’s not even mentioning the ruins of Hiroshima and Nagasaki – 2 of their most important cities, now completely destroyed. Japan basically needed a miracle to get out of this. And that’s basically what happened. The period that followed is literally called the Japanese economic miracle.
During the 1950-80 period, Japan had one of, if not the fastest growing economy out of any other country in the world. This is neatly summarized in the book by Edward Chancellor, “Devil Take the Hindmost”. Here’s only some of the incredible things that Chancellor mentions in his book:
- From 1956 to 1986, Japanese real-estate prices grew by almost 5 000%, while other costs not even doubled
- In the 80s, Japanese stocks grew almost 3 times faster than the profits of their companies
- The buildings around the royal palace in Tokyo were valued at more than the all of the real-estate in Canada or California
The rise
There was, of course, a lot more happening. Japan’s whole focus after the 2nd World War, and during/after the Korean War was to get itself back up. They achieved this mostly by offering any man and woman a permanent employment and a stable, living wage for many jobs. This meant that most of the middle and higher class became simple laborers, which greatly helped in building the foundation for Japan’s future economy.
Japan also started fusing a lot of their businesses together, creating a lot of conglomerates. They also started copying western manufacturing practices and products, which they then sold back to the west for cheaper prices. The aforementioned conglomerates also started buying each other’s stocks, creating a vast cross-share network.
This also lead to a massive growth in Japanese car manufacturing. A lot of new brands were created and some of them are still holding to this day – mainly Honda and Nissan (formerly called Datsun). The quality of these cars also increases, when their manufacturers started to use assembly robots, which eliminated any human error.
Lastly, Japan also became the world leading force in electronics and computer hardware manufacturing. They managed to basically dominate the whole market because of their low prices, caused by the use of robots and cheap labor.
The “Japanese” mentality
Now, let’s not pretend that it was a magical miracle that saved Japan in this period. It was done solely because of the mentality of it’s inhabitants. Even today, when we think about a person from Japan, China, or any other east-Asian state, we imagine a hard working person, who always strives to do his best. This behavior was present even before the 1900s of course, but it was mostly shaped in this period.
From a very young age, Japanese children are taught to always do their best. They are rewarded for perfect attendance at school, and they can spend upwards of 12 hours in their schools (depends on the type of school and their age). They are almost forced to join as many clubs as they can, and because of that, they learn much, much more than any children here in the west.
This hard working mentality is also very well represented in Japanese art from this period. Because the government wanted the people to be happy, they tried to focus a lot of their effort into culture and art development. This led to a major rise in many art forms, be it paintings, music, literature and (the one you most likely know best) anime.
Many protagonist in these art pieces were inspirational figures, often similar to the superheros of today. Their goals were always something great, mostly some form of “save the world”. They achieved these goals by hard work and meticulous training. Of course, there were some outliers in this, as there always are, but we’re talking about the majority here.
If you are interested on how to have a similar attitude as the Japanese, we might have the article for you.
The Korean war
The Korean war also had a significant impact on Japanese development. At the end of World War II, Japan was in control of the whole Korean peninsula, but was forced to retreat after it’s surrender. This lead, among other things, to the USA seizing power over the South Korean area. This, of course, didn’t sit well with the Soviet leaders, who took control over North Korea. This lead to a bunch of conflicts, during which even the discussion of more nuclear weapons was brought up.
The border between North Korean (officially know as “Democratic People’s Republic of Korea”) and South Korea changed a lot during the 1945-1960 period. The USA and the USSR fought with each other over who will control the whole, or at least the most of, the Korean peninsula. This lead to both sides loosing a lot of money, people, and influence (this was the period the USSR’s centrally planned economical system started to show it’s cracks)
But there was one country that didn’t lose anything – Japan. Even though the battles were happening literally next to them, they actually didn’t join any side. Because of this, they were able to quietly grow their own economy, with which they then helped the other states. This lead to the massive growth that Japan experienced
The peak
In the late 1970s and early 80s, Japan became a modern utopia. It’s inhabitants had the highest life quality in the world, while also having the highest GDP ratio and life expectancy. The real-estate market was also experiencing a great boom. A single, average size house could cost up to even 2 million dollars, and some luxurious properties were valued at prices greater than some USA states.
This lead to many people either moving to Japan for business opportunities. Because of that, the centers of many major cities were filled with skyscrapers and hotels, as well as even more real estate, which quickly climbed up in price.
A lot of investors bought a lot of stocks from major Japanese companies, expecting this astronomical growth to continue. They also bought a lot of luxurious things, mainly art, which caused another, albeit smaller, economical bubble, but now all about Japanese painting. As was said a few paragraph above, Japanese art was becoming extremely prominent, so people didn’t want to lose out.
Japan also open itself up for many exporting opportunities, which also caused Japanese businesses to thrive. Because they managed to produce things cheaper, they were able to fairly quickly dominate the market and become one of the world’s best manufacturers for almost anything (Basically the same level of popularity as the “Made in China” tag, but just Japan).
The fall
There’s no point in delaying it. This article is called “Japan’s worst economic crisis” for a reason.
Because of all the factors listed above, Japanese economy quickly grew. Perhaps too quickly. The prices were becoming far greater than what they hypothetically should have been. The Japanese yen increased it’s value by almost 400% in just 5 years, and the economy just couldn’t keep up. The government tried to prepare itself by injecting some more money into the system, but that only worsened the issues in the long run, since it fairly increase the national debt.
What followed was a major economic recession. As quickly as it grew, the Japanese yen lost almost half of it’s value in the next 5 year period. The government tried to fix, or at least delay the recession by increasing bank interest rates, or by trying to forcibly keep the real estate prices down. This only lead to a big deflation, and, in hindsight, only delayed them from actually fixing the problem.
This has lead to the 1980-90 period being called the “lost decade” – A 10 year period, in which Japan went from the very peak of the world’s market, to being one of the worse ones. To be clear, it hasn’t hit the rock bottom, like the Netherlands did 2 centuries prior, but it still lost a lot.
Is it better today?
In short: No.
In slightly longer: Japan is still nowhere close to the peak where it once was. To be honest, it’s not even going back up. Because of the massive debt the Japanese government managed to accumulate, Japan’s economy as a whole is practically still in ruins. The Pandemic also didn’t help – with Japan being hit pretty hard even today, their economy doesn’t look to be on the same way as in the 70s.
This whole endeavor is also reflected on the population. Japan went from number on in quality of life down to around number 30 – not the worst, but nowhere close where it was. Along with that, it is also placed at number 54 in people’s happiness. That’s the lowest of any developed countries of today.
This general sense of unhappiness in most likely caused by one thing. In difference to the permanent employment of before, nowadays, many people (especially young people) struggle to find a real way to financially suport themselves. Because Japan still operates on the same “tireless work” mindset, many people are simply drained from their jobs.
Even nature isn’t on Japan’s side. I’m sure you most likely heard about the Fukushima reactor catastrophe. And that has been caused by Japan experiencing the worst earthquake in the recorded history.
So, overall, the future of Japan is not looking as bright as it did those 40 years ago.
What should we learn from this?
- Never underestimate the ability of investors to go to extremes in the markets.
This goes both ways. It is true that the extremes are much lower and higher than most investors would expect. Japan is a frightening example, but people tend to forget these examples, assuming that nothing like it will happen again in the future. - Valuations matter.
Valuation does not work as a market timing tool. If investors had wanted to use them that way in the past, it would probably have thrown them out of the market ten years before the peak. It’s true that hindsight is always 20/20, but even during the second half of the 1980s, it was possible to label valuations of some assets as “completely off.” - Dependence on the domestic market isn’t always worth it.
All Japanese investors who had invested only in the domestic stock market after the bubble burst found out what it was like to earn below-average returns over the long term and to live in a country whose economic growth was limping behind most of the world. - Don’t invest everything in one asset class.
Equity investors in Japan have discovered that even bonds can be an interesting instrument. From 1990 to 2015, they yielded an average of more than 6% a year. That’s something you could only dream of in the country’s stock market. - Diversification doesn’t lead to better returns, but it does limit the consequences of big declines.
If one invested in global equities in the late 1980s, even the Japanese ones could not spoil their rather interesting returns. Diversification is done precisely because of cases like Japan after 1990.
The negative effects on the world’s investing
In light of the experience of Japan after 1990, it is easy to throw in the towel and resign oneself to investing as a whole. But that would also be a mistake. What might such misjudgements look like?
- The “buy and hold” strategy does not work.
It is true that this strategy may not always work in all periods. If it worked all the time, everyone would use it, and then it would inevitably stop working. Japan is a great example of a strategy that works well one period only to be a disaster for a portfolio at another. Overall, however, it is undoubtedly successful. - The US is another Japan.
While recent developments may at first glance make it appear that the US has similar lost decades ahead of it as Japan, this is not entirely true as there are quite large differences between the countries in demographics, economic diversity and immigration policy. Moreover, most of the developed world is currently struggling with slow growth.
While Japan is a great example of an uncontrolled bubble that every investor should consider, as mentioned, investors like to forget quickly. Market bubbles have existed for hundreds of years, and they will continue to form, inflate and burst, taking investors’ money with them. It is up to the market participants to decide how to deal with them and whether they will still (or finally?) be able to behave rationally when they burst and rise again.
Bonus topic: High Fashion
The best way the problems of today’s Japan has been brought to life in the past years is by the artist Paweł Jaszczuk and his book “High Fashion“. In this book, he photographed several people in Tokyo. They wear business suits, as is custom to, even in the west. Many looking like they just left their office. There is just one thing wrong about them. Paweł depicted these office workers in a place and time you wouldn’t really think of at first.
He captures them at night, sleeping. But not in fancy hotels, or any kind of shelter for that matter. All of his subject are sleeping right on the street, their suitcases on the ground next to them. Some are even sleeping standing up, their only support being a nearby lamp or a wall.
