Investment Warrior Report Archive Article

Japan--Is It Happening Here?

The Japanese stock market and economy have been sidetracked for well over 13 years. After hitting a high of 38,915 on December 29, 1989 the Nikkei 225 average has slipped to just over 8000 today. This represents a loss of close to 80%. Many privately and publicly  wonder, if this is the long term destiny for the United States stock markets as well. I am of the reasoned opinion that we are not! 

A little bit of history will help us decipher the events and see the dissimilarity to our own  markets. The Nikkei 225 stood at  its all time low of 85.25 in July of 1950. From there it had a tremendous 39 year bullish trend returning on average a 17% compounded return annually just from capital appreciation alone. If one were to include dividends, the return was close to 20% per year!  The Price/Earnings ratio of Japan's bluest blue chips was near 50! This represents one of the most incredible bull runs ever in both size and duration in history. The United States has never come close to such irrational exuberance.  Obviously, this type of return was a bubble and was bound to burst. 

Through an unhealthy tight alliance of trade protectionism, government, business consortiums and bizarre accounting techniques, the Japanese created the illusion of an economic juggernaut. It is not unfair to say that the Japanese market was sort of an Enron, but on a national scale!  The Japanese took a huge market share of the world's steel industry through the help of government subsidies, yet only ever produced a return of 1% annually on this huge investment. Protectionism encouraged lack of innovation and change within  domestic industries. Because of cross relationships between the banks and corporations, bad news was secreted away with unacceptable accounting practices and lack of disclosure on a massive scale. All towers built on sand eventually fall, but the truth of their predicament was denied constantly as its market and currency fell thru the 1990s. Cultural bias against admitting to failure further exacerbated the situation. Today,13 years later,  with the Nikkei at 8000, the overall return since 1950 works out to 9% annually. This is in line with most other stock market returns over the same period of time. Market P/Es are now much more reasonable in the lower 20s and interest rates are virtually zero. In fact Japan has probably found its feet and better days are ahead, but it took this 13 year period of suffering to get here.   

Can it happen here too?  In a word...No! Although we have experienced a large drawdown over recent years, our system is the most self cleansing of any stock market and economy  in the world. We do not have a general practice of trade protectionism, and in spite of scandals like Enron, our accounting is for the most part, very much above board. There is a healthy enough distance between lenders, government and investors, that we will allow for failure quickly rather than slowly. In fact, it can be argued that the best thing about the American free enterprise system is that it allows for failure faster than any other system. This constant reengineering and creative destruction of our business order allows for capital to flow to the most efficient places within it.  What has taken Japan 14 years of pain to accomplish we have been able to do in 3. Although it may take a bit more time for the market averages to reflect it, the United States continues to be an excellent place for economic success in the future. Count on it! 



Copyright 2003 Lussenheide Capital Management