Learning from Japan

Has there been a more demoralizing and disappointing major stock market, over the course of the past 20 years, than Japan's? It reached its nominal all-time high of 38,957 in December 1989; it closed today at 8,693, just 800 points or so north of its 2003 low.

The plight of Japanese shareholders is germane to anybody thinking of buying stocks today. Japan's companies are well-run, and its financial institutions, as we saw with the MUFG deal, are today more part of the solution than they are part of the problem. And yet, as Tim Price notes,

the entire Japanese stock market is left trading close to book value at levels, in real terms, equating to where it traded in the early 1970s.

Japan, of course, knows what it's like to go through a credit crisis and a vicious deleveraging -- and it's had two decades to reconfigure itself into a viable post-crisis economy. Which is not to say that Japanese stocks are a screaming buy right now, but which is to say that if you think that stocks in the US are cheap, maybe you could look across the Pacific and find some equally-attractive assets which are even cheaper. Or, to put it another way, the lesson of Japan is that even cheap stocks can continue to decline for decades.

The US will never again drive the global economy in the way it has done for the past 60 years, and the presence of multinationals on the Dow does not make it a proxy for world stock-market performance. Japan still accounts for a large chunk of global economic activity; it might makes sense, if you're not invested there already, to rotate some small part of your funds into a country which learned many painful lessons over the course of the 1990s. Assuming, that is, that you still have any faith at all in equities as an asset class.

Comments

[whidbey:]

Why have the Japanese not clear up their banks and the nonperforming loans. Apparently they don't want to know just how uncompetitive many firms are in world commerce.

Maybe you are correct regarding the future of US equities, but if not the US who will come forward with the innovation that drives new markets? It does not hang together when one probes the simile.

2008 Oct 18 11:24 AM

[bearfund:]

Maybe in a broader sense the lesson here is that no one is going to "drive the global economy" in the way the US has unless they are doing so with a torrent of debt fueled by lax monetary policy. If we imagine for a moment that paper currency and fractional reserve banking did not exist in any country and gold and silver were circulating as the only form of money worldwide, who would be the leaders? Which corporations, countries, political systems, etc. are really best positioned to deliver sustainable long-term growth? It's every bit as hard to filter out the effects of a credit collapse as it is to filter out the effects of the monetary binge that led up to it. And in the absence of all that paper, real growth rates are so small that you might hold something for 10 years before you realise that your return in that time is only half - or double - that of the market as a whole. This has always been true: real growth of 5% is astonishing; 2% is typical. Virtually all returns on equities come from dividends. Your challenge as an investor is to find those circumstances that will allow large dividends to continue to be paid for the next 20 years.

That, or guess correctly as to who will next flood the market with paper money and where that paper will end up, raking in a nice 1000% return in 5 years. To hell with sustainable growth, dividends, and investing; where's the next bubble? I don't think it's in Japan.

2008 Oct 18 12:37 PM

[fatcat:]

Well said,Bearfund..

2008 Oct 18 01:06 PM

[joe1:]

the only thing way i cant compare the two is the cultural difference between the American and Japanese consumer. From what i understand, one is a saver and one is a spender.

2008 Oct 18 03:25 PM

[moonbat1775:]

I hardly blame the leftists;
the bankers got us here.
T'would be no need to steal from them
if it was honestly theirs.

They counterfeit some money
and lend it out for rent.
It might seem a gift from heaven
but from hell t'was surely sent.

2008 Oct 18 06:29 PM

[css1971:]

bearfund wrote:

"Which corporations, countries, political systems, etc. are really best positioned to deliver sustainable long-term growth? It's every bit as hard to filter out the effects of a credit collapse as it is to filter out the effects of the monetary binge that led up to it."

Much as I agree with much of what you say, just one comment.

"Sustainable growth" is an oxymoron.

e.g.
www.youtube.com/watch?...

The answer is "no" BTW.

2008 Oct 18 06:44 PM

[moonbat1775:]

'The answer is "no" BTW.' css1971

Then that applies to the utube creator too and also you.

Your argument is self-refuting.

2008 Oct 18 07:37 PM

[Smarty_Pants:]

The utube video overlooks the positive aspects of economic growth and concentrates only on the bad aspects.

If I can grow my business by 10% while consuming only 5% more of my inputs that is a net positive. Most likely a great part of the growth of my business will be from customers leaving my competitors, thereby reducing the raw materials needed to satisfy their demand in the market.

The video also overlooks the impact of pricing on growth. At some point a business that is growing rapidly runs into supply problems or limits. As the over-sized demand continues the cost of supplies is bid up, prices on the final product are increased to cover rising costs of inputs, and the higher prices of the final product work to restrict delivery to those who are willing to pay the highest price for the product.

The result of a truly free market is that limited goods are distributed to their best possible use via the pricing mechanism. Those who most 'need' a good will be willing to pay the highest price in order to get delivery. Those who 'need' the good less direly won't be willing to pay as much and will decide to forego the good at a high price.

Assuming unlimited and unthinking growth is a poorly stated problem that overlooks key economic laws regarding supply, demand, and pricing.

2008 Oct 18 09:14 PM

[Smarty_Pants:]

The article is correctly casting the issue facing our economy here in the US. The Japanese response to their economic problems was taken from the same play book as the US response. The results will be along the same lines.

The money that the government is using to bail out the insolvent businesses might have been put to more productive uses. Propping up (ie. subsidizing) failed businesses will only generate more of the same failures.

Expect the US economy to under-perform for quite some time while the huge amounts of newly generated fiat currency work their way through the system and slowly drive price levels up in the long run.

One key difference, as joe 1 noted, is that the Japanese had a huge savings base when their 'crisis' hit. The US has squandered most of its savings in the last 20 years choosing instead to spend it and then borrow and spend even more by going into debt. This will not help the situation and will only serve to prolong the stagnant conditions.

2008 Oct 18 09:22 PM

[moonbat1775:]

Also, high birth rates are correlated with poverty not prosperity.

The key to less breeding
is liberty, freedom,
which leads to prosperity.

And if you were poor,
with nothing to do,
just what in the dark
do you think
you might do?

2008 Oct 18 09:29 PM

[moonbat1775:]

Another nail in the "dumber than yeast" argument. We are reaching a point where:

Knowledge (unlimted except politically) + Energy(unlimited except politically) + raw materials (unlimited) = Progress

Our problem is the status quo loving elites who hate crowded country clubs. They benefit from a dishonest banking system.

2008 Oct 18 10:34 PM

[Alex Filonov:]

The only thing we can learn from Japan: never follow their path. The country is in permanent Great Depression, slightly lifted last several years by Chinese growth, but now back in force. Come on, US only had Great Depression for 12 years, 1929-1941. Japan: next year we will celebrate 20 years of Japanese Great Depression. We cry that our national debt is 70% of GDP. Japanese national debt is more than 110% of GDP!

2008 Oct 18 11:53 PM

[Steven Hansen:]

the japanese and american economies are very different. if the usa begins to bank its wages instead of spending we will be in the same place as japan. unfortunately the usa is doomed to the path of credit spending to maintain its growth.

2008 Oct 20 06:04 AM

[tuj:]

"The key to less breeding
is liberty, freedom,
which leads to prosperity."

NO! Actually its vaccines! There have been many studies done on this. If you prevent illnesses from killing children before they reach adulthood, obviously more survive. Now this seems initially counter-intuitive, but parents in poor countries have many kids to make sure some survive to adulthood and also survive to care for them when they are older. If you can increase the confidence in those survival rates, you decrease the birthrate that people will sustain to feel confident in their future. And studies confirm this (see "The Bottom Billion").

Besides, liberty is defined as the Freedom to Act, usually without the government interfering. Aside from China, I don't know of any country that has policies on breeding, particularly to the up-side....

You need to fulfill a hierarchy of needs. Liberty and freedom mean nothing without basic life necessities. Or without basic rule-of-law/security. Magic "freedom" does not lead to prosperity; it is one of the results of prosperity, and there is almost certainly a threshold of prosperity a nation must obtain before things like a liberal-democracy can be implemented well.

Consider Afghanistan after the Soviet Union left, or recent Somalia. The vacuum of power has people turn to whatever source of security they can, in those two cases, Sharia law. Many people did not think it the best choice, nor were they particularly happy with those 'running' the system, but they accepted it and embraced it willingly over anarchy.

2008 Oct 20 02:01 PM