The Vapors Cover Art. © United Artists. Source: Wikipedia.
That’s the market that should scare all the investors, financial planners, asset managers, and market mavens out there. The Japanese stock market has been in a bear market for the past 25 years—down 2% per year, even after dividends. By contrast, the US has grown 9% per year. And Europe is in the middle: the UK is up 4%; Germany is up 7%; France has grown 3% per year.
The divergence is striking. When I was first starting out as an investor, “Turning Japanese” was a hit song. With their roaring stock market and seemingly omnipotent industrial policy, Japan seemed unstoppable. At one point in 1989, it was estimated that the market value of Japan’s Imperial Palace was greater than the entire State of California.
Well, we know what happened next. Their real-estate bubble burst and their banks all went insolvent. In fact, because of the keiretsu practice of corporate equity cross-ownership, most of corporate Japan was insolvent. The government decided to prop up these companies and try to spend their way to prosperity. So from 1990 to last year, Japan’s economy grew by less than 2% per year. And their equity market collapsed.
Could it happen here? Sure it could. A combination of hubris, xenophobia, and policy errors have combined to saddle Japan with immense debt, zombie corporations, and a falling population–even though they’re technologically sophisticated. And Tokyo reportedly has a bunch of great restaurants! There’s no law of nature that says markets and economies have to grow and produce returns just because we need them. The key to US prosperity has been a competitive economy and an open society. But we can choose policies that would destroy that, if we wish.
Could our economy and market “turn Japanese”? Let’s hope not. But don’t say it isn’t possible. That’s why it’s so important to have a globally diversified portfolio.
Douglas R. Tengdin, CFA
Chief Investment Officer