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Presently, one of the biggest fears is that the U.S. markets could have peaked in a giant bubble back in 2000, and will be working off that event for decades to come. This is reminiscent of Japan, where the Nikkei peaked at 40000 back in 1990, and 21 years later it still languishes at 8523, a full 78.7% lower.

This fear is compounded by other similarities, like the 10 year bond presently below 2% and the short term rates at 0%. Or maybe even the fact that it was Japan that first tried quantitative easing, something the Fed has now done twice as well.

This article, however, will present 3 main reasons why the U.S. is not Japan, in spite of the similarities. These are:

1. Demographics

This is perhaps one of the strongest reasons. When the Nikkei peaked back in 1990, Japan had a population of 123,611,167. 10 years later, the population stood at 126,925,843 for a growth rate of just 2.68% over 10 years. And presently, the population is not only estimated at 127,760,000, little changed, but more importantly, it is falling and expected to continue doing so. All the while, a full 22.7% of the population is 65 or older.

The U.S. has been, and is, a very different country. When the Nasdaq peaked back in 2000, the U.S. had a population of 281,421,906. 10 years later, the population stood at 308,745,538 for a growth of 9.71%, hence much faster than Japan’s. Not only that, but the U.S. population is predicted to continue growing, with the Census Bureau seeing growth of around 10% in the next 10 years, which is helped by immigration influxes of over 1 million per year. Finally, presently (2010, CIA Factbook) only 12.8% of the population is 65 or older.

Population growth is one of the components that helps economic growth.

2. Valuation

The Nikkei peaked at a P/E over 65. 10 years later, it still stood over 100, given the effects of economic recession and deflation.


(Click to enlarge)

This is in stark contrast with the S&P’s P/E right now, which stands at 13 (using ttm earnings, Robert Shiller’s data)

3. Inflation

The stocks we buy are a nominal reality. If whatever the companies sell is inflated, both revenues and earnings are inflated as well. So, cumulative inflation ends up increasing the nominal value of the shares. The indexes, themselves, are thus also inflated.

In January 1990, Japan’s CPI stood at 92.5. In October 2001 it stood at 101.4, for a cumulative inflation of 9.62%.

In January 2000, the U.S. CPI stood at 168.8. In October 2011 it stood at 226.421, for a cumulative inflation of 34.14% - 3 times more than Japan.

This is yet another reason to believe the U.S. is different. What matters for the nominal price of shares is the nominal economic growth, and higher inflation makes for higher nominal GDP.

Conclusion

Besides the factors named, there are many other obvious ones, like culture. However, just the factors that I presented – which are easy to be objective about – already present a very clear case that the U.S. is a lot different from Japan, and the U.S. market’s behavior will be a lot different too. Given these factors, it’s quite possible that we could see new (nominal) highs in the U.S. markets with much greater ease than is the case with Japan.

Source: 3 Reasons Why The U.S. Is Not Like Japan