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Quote of the Day
“Japan’s stock market spawns two kinds of investors: believers and skeptics. The believers are getting rich. The skeptics are getting sore.“
-Quote from a Wall Street Journal article published January 3rd, 1990, just a couple days after the Nikkei index reached its all time high of 38,916. Of course, the index would fall more than 80% over the next 20 years, concluding one of the largest asset bubbles in modern stock market history.
December 29th – This Day in Stock Market History
December 29th, 1954 – The Dow Jones Industrial Average closes above 400 for the first time in history, 25 years after first crossing the 300 mark!
It took stock markets 25 years to recover from the great depression’s decline. The Dow would finally pass its September 3rd 1929 highs of 381.17 on November 23rd, 1954 when it closed at 382.74. The Dow would more than double over the next 5 years.
December 29th, 1989 – Japan’s Nikkei index peaks at 38,915.87.
The rise of the Nikkei would ultimately be one of the largest stock market bubbles in history. On this day, the Nikkei would peak just shy of 39,000, and begin a very rapid decline. By October 1990 the index would be cut in half, trading around 20,000.
The index would not find a bottom for 20 years, reaching as low as 7,054 0n March 10, 2009 – a total decline of 80.5%.
What was it like in the late 80’s in Japan?
The bubble was largely built on the back of a massive real estate bubble. From 1956 to 1986, property prices in Japan rose 5,000%. Banks would lend against land as collateral, with little regard to underlying business. By the end of the decade, the total Japanese property market was valued at 2 QUADRILLION Yen, more than 4 times the value of all real estate in the United States. Office space in Tokyo would rent for $290 per square foot, and the grounds of the Imperial Palace in Tokyo would have a value greater than all of the real estate in California!
It goes without saying that greed and excess were everywhere in the last 80’s:
Companies would trade at incredible Price to Earnings (or P/E Ratios). The textile sector traded at a P/E ratio of 103, services companies traded at a 112 multiple, Japan airlines traded at a 400 multiple!
In 1989, The Mitsui Corporation bought the Exxon building in Manhattan for $610 million, paying $260 million over asking price because the president of Mitsui wanted his name in the Guinness Book of World Records. Japanese companies would also buy New York’s Rockefeller Center and Hollywood’s Columbia pictures before the end of the decade. There was widespread fear that Japanese companies would buy up significant portions of U.S. real estate and businesses.
Operating profits of many Japanese companies began to decline as early as 1985, but because of a law established in the early 1980’s, Japanese companies were able to invest money in securities (stocks) tax free in “tokkin” accounts. By 1989 Japanese companies held over $300 billion (40 trillion yen) in these accounts. Traders bid up stock prices of declining businesses not because of the underlying business, but because of the stocks the companies held in their tokkin accounts. This created a dangerous circularity in the Japanese financial system. By the end of the 1980s, even large companies like Toyota, Nissan, and Sharp would derive more than half their income by way of these speculative accounts, not from the operations of their business!
Money was so loose that many Japanese companies could borrow at negative interest rates with warrant bonds and currency swaps. Bonds were effectively set with negative interest rates, but they had attached stock warrants to them, investors gladly paid companies to borrow in exchange for discounted shares in the future. Of course when the stock market bubble burst, these warrants would become useless.
To this day, even a few decades later, the Nikkei has yet to recover from these euphoric highs. In fact, even today, 29 years later, the index stands at a level nearly 50% lower than 1989:
Source: Devil Take the Hindmost: A History of Financial Speculation
December 29th, 1999 – Nasdaq closes over 4,000 for the first time, after just crossing over 3,000 November 3rd. The momentum would continue has the 5,000 barrier is crossed March 9th.
The tech bubble was in its final “euphoric” stage. Stocks had risen more than 33% in less than 2 months, and would still rise another 25% before peaking on March 10, 2000 at 5,048.60.
Best December 29th in Dow Jones Industrial Average History
1931 – Up 2.71%, 2.0 points.
Worst December 29th in Dow Jones Industrial Average History
1915, Down 1.21%, 1.2 points.
Read of the Day
Kamikaze Capitalism – By Michael Lewis
Michael Lewis the the author of some excellent financial books, and his commentary on the Japanese stock market bubble is no exception. This article was originally published for The Spectator, and is responsible for the term ‘Kamikaze Capitalism” that took hold to describe the Japanese financial system.
“Japan has replaced America as the world’s most financially obsessed nation. Japan’s leading financial daily — the Nikkei Shimbun — has eight million subscribers, Compared to the Wall Street Journal’s two million. There are streets in Tokyo in which stock market quotations are easier to find than the time. There are Shinto shrines that each January issue tip sheets of hot stocks for the coming year.”
The article is a great look at the Japanese bubble, and its early aftermath (this article was written in June 1990, the Nikkei had fallen about 35% from its peak at this time).
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