The Japanese stock market crash: the bursting of a bubble [Members]
For MAVENS and MOGULS by The Accumulator
on December 10, 2024
The Japanese stock market crash of the early 1990s is the investing equivalent of a scary bedtime story. “What about Japan?” the old hands mutter darkly whenever the youngsters get overly excited about their S&P 500 profits. As well they might, because the Japanese nightmare has an irreducible ‘There but for the grace of God…’ quality about it.
Partly that’s because the bursting of the Japanese bubble was such an extraordinary fall from grace.
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Sequence of returns? Catastrophic failure?? Fine line; scary indeed. Thank you @TA for a fascinating analysis. We may have had a bit of a dart at Rob Dix’s choice of sampling over the weekend, but there’s definitely a whiff of the lottery ingrained in all of our retirement investments!
Super interesting stuff. Especially the “What if you weren’t 100% Japan?” analysis, which was always the question that’s been in my mind in response to “what about Japan”. That analysis has calmed my slight nervousness of most of my wealth sitting in a global tracker and having so much exposure to the US.
> stories of Japanese investors paying record amounts for art and golf clubs.
Diversification in action. Buy land – they’re not making any more of it. Wonder how they fared relative to the stock market?
Out of interest, d’you know what the PE was at the high water mark?
Brilliant piece. Many thanks @TA
Ben Carlson of AWOCs has Japanese stocks and real estate up to 1990 as the GOAT bubble:
https://awealthofcommonsense.com/2016/09/the-greatest-bubble-of-all-time/
https://awealthofcommonsense.com/2021/02/the-defining-trait-of-all-bubbles-the-willful-suspension-of-disbelief/
Whilst his colleague Barry Ritholtz’s choice for the worst % stock exchange index crash is Cyprus from November 1999 (that index only bottomed in 2015, the year after the article below):
https://ritholtz.com/2014/03/the-worst-bear-market-in-history/
@ ermine
Grantham has it as 65x https://www.gmo.com/europe/research-library/waiting-for-the-last-dance_viewpoints/
What a thrilling read! I also loved the what if part, which is mostly missing from Japan stock market articles.
Seeing the volatility there was also a lot of money to be made, if you were lucky! I’d love to talk to a Japanese investor who made money through all those years
@tetromino #5 thanks, and – well, 65! holy crap – irrational exuberance as they said of the dotcom bubble, just twice as much
Excellent (if scary!) article, @TA. I’d be interested to know how quickly (slowly) an investor would have broken even if they had been yen cost averaging from the peak rather than putting in a lump sum?
Windy
@Ermine – I’ve seen quite a few different estimates from P/E over 100 to somewhere in the 70s. I haven’t seen Tetromino’s link before which is different again. Obviously it goes off the charts no matter how you cut it, although P/E is a relative number i.e. best compared against the (higher) Japanese average than the US or UK mean.
The fall in property values was dreadful. As I understand it, many non-real estate Japanese firms speculated on land values and became known as property bets tethered to a stock price.
@pourquoi pas – absolutely. I haven’t come across an account from a Japanese investor who lived through it. There must be some translations out there.
@Windy – yes, it’d be interesting to run through some scenarios. You could imagine a 22-year old with little exposure at the peak, who only starts investing serious amounts at age 35. They’d be OK. Versus a retiree, fully invested at the peak, with only withdrawals to come, they’d be in trouble.
That said, I think Japanese bonds were fine – boosted by falling interest rates and deflation
I’ve read a withdrawal rate analysis that had a 60/40 Japanese investor retiring in 1989 running out of money after 22 years using the 4% rule. They just scraped over the 30-year mark using a 3.3% SWR.
The ‘Japanese investor’ example reminds me how odd it can be to deal with Yen amounts when you’re used to GBP. The 1,000 Yen quoted is only a fiver, so feels a little out of place. I wonder if Japanese sites show returns per 2,000,000 Yen or similar.