Japan’s Lost Decades: Are We on the Same Path?

Michael LebowitzAdvisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

Back in 1989, Japan was taking over the world. The country's economy had grown 6.7% in 1988. Sony had just bought Columbia Pictures, one of the largest Hollywood studios, for $3.45 billion. Japanese property company Mitsubishi Estate took control of Rockefeller Center in New York City that October. When land prices peaked in Tokyo, Japan's Imperial Palace grounds were more valuable than all the land in Florida. – WSJ

At its height, in 1989, real estate in Tokyo sold for as much as $139,000 a square foot – more than 350 times as much as choice property in Manhattan.Vanity Fair

Some say the U.S. economy and financial markets are in bubbles of epic proportions. Undoubtedly, our increasing dependence on debt to fund economic expansion and years of prior deficits is unsustainable without central bank intervention. Furthermore, there are hints of irrational exuberance in the stock, credit, and crypto markets.

While we are in a bubble of sorts, our situation pales compared to Japan's bubble and subsequent lost decades.

total debt

Japan's situation then and ours now are in no way an apples-to-apples comparison. But there are similarities. Accordingly, the lessons Japan learned and the price they continue to pay for extreme leverage and irrational exuberance are worth understanding in hopes we can take steps today and avoid Japan's lost decades.

Japan's twin bubbles

In the first week of January 1990, Japan's Nikkei 225 stock market index peaked at 38,916. As shown below, the Nikkei index surged 488% in just 10 years preceding that record high. At the time, its P/E ratio stood near 60. Today, 35 years later, the Nikkei has finally set a new record high. Over the same period (1990 to current), the S&P 500 has risen by 1350%!