Are We on Japan's Path of Stagnation?

michael lebowitz

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In my recent piece, “Japan's Lost Decades,” I examined why Japan's GDP is smaller than it was in 1995 and why it took 35 years for its stock market to set its recent record high.

Often, it is said that the U.S. is following Japan's path. That path includes a stagnant economy, massive government debt, and a central bank that must dominate financial markets to keep the economy and financial markets afloat.

There is merit to that opinion. The U.S. government has excessive debt and is increasingly negligent in managing its budget. Also, the nation's economic growth rate has been trending lower for 30 years, and fiscal dominance is becoming the norm, not the exception.

While we may be on a similar path as Japan, we are not nearly as far along, however. There are many differences between Japan and the United States worth considering.

All Asset Bubbles Are Not Alike

Japan's current problems have their origins in the country’s massive real estate and stock bubbles that popped in 1989.

To appreciate the enormity of these bubbles, consider the following bullet points from Ben Carlson's article, “The Biggest Asset Bubble In History”:

  • From 1956 to 1986, land prices in Japan increased by 5000%, even though consumer prices only doubled in that time.
  • By 1990, the Japanese real estate market was valued at 4x the value of real estate in the United States, despite being 25x smaller in terms of landmass and having 200 million fewer people.
  • Tokyo itself was on equal footing with the U.S. in terms of real estate values.
  • The grounds on the Imperial Palace were estimated to be worth more than the entire real estate value of California or Canada at the market peak.
  • There were over 20 golf clubs that cost more than $1 million to join.
  • In 1989, the P/E ratio on the Nikkei was 60x trailing 12-month earnings.
  • Japan made up 15% of world stock market capitalization in 1980. By 1989, it represented 42% of the global equity markets.
  • From 1970-1989, Japanese large-cap companies were up more than 22% per year. Small-caps were up closer to 30% per year, for 20 years!
  • Stocks went from 29% of Japan's GDP in 1980 to 151% by 1989.
  • Japan was trading at a CAPE ratio of nearly 100x, which is more than double what the U.S. was trading at during the height of the dot-com bubble.