25 Years After The "Top" In Japan, Have We Learned Anything?

Tyler Durden's picture

The Japanese stock market reached its all-time-high on December 29th 1998, and as The Wall Street Journal reports, analysts were still looking forward to another strong year for shares in 1990, despite some signs of danger. Reading through the headline on that day suggests, 25 years later, investors and talking-heads have learned absolutely nothing...

 

h/t @RudyHavenstein

 

The article was published Jan. 2, 1990.

Tokyo Stocks: Japan’s Believers Expect Surge in Stocks to Continue

 TOKYO–Japan’s stock market spawns two kinds of investors: believers and skeptics. The believers are getting rich. The skeptics are getting sore.

For much of the past decade, the world’s biggest stock market has stumped the skeptics. Price-earnings ratios are astronomical. The differential between interest rates and corporate earnings is wide. Yet just when the market seems most top-heavy, it heads even higher.

The skeptics’ experience has been a litany of missed opportunities, and last year was no exception. The year-end rout many analysts feared in the bumpy days after the Oct. 13 slump turned into a record-stomping rally.

For believers, Japan’s stock market has been a money-spinner. Daiwa Securities Co. estimates that $100 invested in Japan’s market in 1981 would have generated capital gains worth nearly $650 today at prevailing exchange rates. The same amount invested on Wall Street would have earned $185 above the initial $100 invested.

As Tokyo’s market gallops into the Year of the Horse, the skeptics once again are wondering how long the market’s advance can continue. The believers are betting that it won’t slow anytime soon-and the consensus emerging from 1990 forecasts supports them. Even cautious predictions call for the Nikkei Index to end 1990 above the 45000-point level, climbing from its 1989 close of 38916. Other markets may perform better — and many did in 1989 — but few trend so chronically higher.

“We’re looking for another good year,” says Lawrence S. Praeger, chief strategist for Nikko Securities Co. Adds Christopher Russell, manager of research at Jardine Fleming Securities Co.: “The market looks well set.”

Behind such uniform optimism are many of the same fundamental struts that supported the 1989 market. The economy is expected to grow nearly 5% in the year ending March 30, and many economists already are predicting growth of more than 4% for the following year. Also, recurring corporate profits will grow about 11% in both years, according to forecasts by Nomura Research Institute 4307.TO +0.13%.

“The outlook is extremely good,” says Pelham Smithers, a research analyst at Shearson Lehman Hutton Inc.’s Tokyo office. Even the risk of a long-term decline, he notes, appears more limited than it was in 1989.

That’s mainly because some of the key negatives that sapped the market’s strength at times won’t recur. Last year, for instance, the market was hurt by a prolonged slowdown in market speculation and economic activity caused by the January death and February funeral of Emperor Hirohito. The market was then dragged lower at midyear by a series of political scandals. And external events took a toll, with the crackdown in Beijing weakening investor confidence in companies with ties to China.

Most of those market pitfalls were temporary. True, there is the chance of political trouble in February, when Prime Minister Toshiki Kaifu is expected to call a general election. But polls suggest his Liberal Democratic Party has been getting stronger, not weaker. Any gain by the party surely would aid market sentiment.

Yet there are a handful of danger signs that investors must guard against, analysts say. “The biggest negative for the market would be if the dollar picks up,” says Shearson’s Mr. Smithers. A weaker yen would increase the price of imports, fueling consumer-price inflation — which is expected to rise more than the government’s estimate of 2% this year in Japan. That might force the Bank of Japan to raise interest rates, which would tend to discourage stock market investment.

Moreover, some analysts worry that a weaker yen would exacerbate Japan’s trade surplus with the U.S. and might trigger protectionist measures by Washington. That kind of fight could hurt a lot of companies and send the market into a slide.

Any signs of these factors could be enough to send Japan’s institutional investors scurrying into cash. And because big investors, who tend to act in unison in Japan, are such major forces, that could set off a broad decline.

It’s that vulnerability that has caused some skeptics to miss out on some of the Tokyo market’s broad gains.

The skeptics fret that the price of Japanese stocks averages more than 60 times the issuing company’s per-share earnings. That price-earnings ratio is more than four times the U.S. average. And the differential between the yield available on short-term interest-bearing instruments, such as certificates of deposit, and the average earnings yield of Japanese stocks, is nearly 4% — high by historical standards.

These days, though, instead of analyzing why those numbers point to a collapse in share prices, more analysts are trying to explain how, with no wires apparently attached, stocks are still flying.

For instance, Paul H. Aron, vice chairman emeritus of Daiwa Securities America Inc., is the beacon of a movement that aims to show that differences in corporate accounting and business practices account for most of Japan’s high P-E ratios. If the ratios were adjusted for the differences, he says, Japan’s average P-E ratio would have been about 17.5 at the end of August, against a U.S. average of 13.5.

Another factor that boosts stocks is rotational buying. Instead of buying across all sectors, Japanese investors tend to look for special circumstances that will help one sector or another. Stocks that might benefit from a reduction in tensions with the East bloc or from economic cooperation with the Soviet Union rallied strongly in the last quarter of 1989 and are expected to continue advancing.

“In between the sector rallies, there could be some cooling down,” says Robert Jameson, an executive at Dresdner Bank’s Tokyo brokerage unit. “But a year is a long time in the Tokyo market, and it won’t stay cool for long.”

* * *

It's never different this time

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Rakshas's picture

Kim K has a big ass ...... I didn't know that 25 years ago.....

 

..... I'm sorry what was the question??

Dr. Richard Head's picture

I believe they were asking about Miley Virus's nipples.

MOAR QE FOR EVERYONE!!!!

knukles's picture

May I also point out that in December 1989, 10 year JGB's were yielding 6.625%.
That's right sweetie cakes.  6.625%

They're now about 0.50%
That's right again, you're reading correctly.  0.5%

That means that over the last 25 years in Japan, rates on 10 year JGB's dropped by 6.125%

Now, for the last time.
We're merrily skipping down the same garden path that the Japanese have carried along on for the past 25 years.
Massive fiscal deficits and monetary stimulus and lookie lookie lookie.
They're in a Liquidity Trap
We're in a Liquidity Trap
And we're doing the EXACT same things as they've already done!

Where ya' think rates are going to?

Nope.  Lower.  Lots and lots lower.
Because nobody fucking pays any attention to where we been, where we're going, why and wherefore art thous don't matter.
The Japanese have been trying to make reality conform to Classical Physics in a Quantum World.
Guess what?

Winston Churchill's picture

At the deathbed of fiat and you are holding bonds knuks ?

Good luck.

Pool Shark's picture

 

 

Knuks is right, Winnie.

The US 10-yr is currently yielding 2.2%

It'll see 0.50% before it sees 4%

We are all Japan now...

[P.S: Even with the Dow in record territory, Bond Funds have outperformed the DOW year-to-date...]

 

Bunga Bunga's picture

Interest rates can never go up without significant growth. Banks lend 30 years for fixed 3.9%, but they have to refinance themselves at a variable rate. As soon as rates go up, that will be game over for banks. The only way out is significant credit growth, so they can average up interest earnings quickly, but I don't see this growth coming.  

cowdiddly's picture

Right on all counts Knuck.

I know you haven't checked in a month or so but I checked last Friday. 10yr JGB was .31% which only further proves your point.

After all, whats another 20% down from .5 among friends. Those .5s are lookin phat.

 

Antifaschistische's picture

agree with you knuck...

..."lessons learned", well that's a bit deceptive because I'm not sure anyone is learning anything.

...in line with ZH Theme of 'everything goes to zero', what we continue to demonstrate is that you can't store wealth forever by stacking larger and larger piles of fiat.  Eventually, redemption day cometh.  sometimes fast.  sometimes slow.   And as I've said before I'm not an anti-fiat guy...I just recognize it as a means of facilitating short term debt/IOUs and not long term wealth stockpiles.

will they be forced to liquidate US Treasuries now that they have a negative savings rate?

The real Reckoning Day is yet to come.

Fun Facts's picture

"They're in a Liquidity Trap
We're in a Liquidity Trap
And we're doing the EXACT same things as they've already done!"

this is the key, because it's all one big comingled comargined system. If any Rothschild CB goes down, the system goes down. This is why the FED handed out 15T to their foreign syndicate affiliate banks in 2008.

So it's looking more and more like a system wide systemic liquidity trap but not exactly in the classical sense due to both debt monetization as well as open market operations.

Luckhasit's picture

And THAT'S why only CBs are buying bonds. 

Game is already over. 

Ewtman's picture

It's been obvious for some time to most informed people, Abenomics is a failed policy. 

 

http://www.globaldeflationnews.com/abenomics-failing-to-liberate-japan-f...

Dr. Richard Head's picture

The failur also belongs to Regan's Trickle DOwn Economics aka Obama's Wealth Effect aka Fiat Debt based slave currencies. 

Winston Churchill's picture

You forgot the Nixon shock which made all the utopia possible.

Excuse me , I have to go feed my unicorns.

Greenskeeper_Carl's picture

Don't forget to collect all the skittles they shit out, and remember, their farts are going to power the country after we get rid of fossil fuels to combat climate change....

besnook's picture

derivatives popped the japanese bubble with an assault on the yen led by chase manhattan using interest rate and currency swaps as proxies for the yen. the yen value collapsed along with the economy.

mindyou, the every day economics of the people have actually improved a bit since the "collapse" but the banks have never recovered which is the source of the doomsayers cry. deflation has been good for the people in general. the "lehman shock" caused acute problems but not the chronic issues felt by the usa and europe.

now that japan has moved to the yellowback currency called the yen we will see if japan can pull off the ultimate feat of fiat money, responsibility and discipline.

MrButtoMcFarty's picture

And why would it NOT continue to climb?

Don't you get it yet?

q99x2's picture

I think we've learned that we are all doomed unless somebody stands up and arrests the criminals at the top.

jon dough's picture

.

 

We have learned that in 25 more years it will be their golden anniversary.

 

Rots of ruck, lound-eye...

Dazman's picture

I would contend that we are right now as Japan was in the run up to 1990. 2008 was not our Japan 1990 peak.

The market will explode one more time, perhaps for years. And 20 years on from that point we will see a chart similar to the above; and similar for bonds yields too, which are still insanely high compared to other world markets.

yogibear's picture

So Bernanke wanted to follow Japan.

besnook's picture

bernanke did follow japan. the boj, however, is .gov owned(de facto, not like the fake "federal" reserve). japan now has the yellowback. they own their currency. the zionutz own the dollar. who would you trust with your money if you had a choice?

suteibu's picture

"The skeptics fret that the price of Japanese stocks averages more than 60 times the issuing company’s per-share earnings. That price-earnings ratio is more than four times the U.S. average. And the differential between the yield available on short-term interest-bearing instruments, such as certificates of deposit, and the average earnings yield of Japanese stocks, is nearly 4% — high by historical standards."

"For instance, Paul H. Aron, vice chairman emeritus of Daiwa Securities America Inc., is the beacon of a movement that aims to show that differences in corporate accounting and business practices account for most of Japan’s high P-E ratios. If the ratios were adjusted for the differences, he says, Japan’s average P-E ratio would have been about 17.5 at the end of August, against a U.S. average of 13.5."

That is some Grade A bullshit, right there. 

I wonder what Paul H. Aron is doing now?

flrzero's picture

Well, I was more intrigued by this genius:

“The outlook is extremely good,” says Pelham Smithers, a research analyst at Shearson Lehman Hutton Inc.’s Tokyo office. Even the risk of a long-term decline, he notes, appears more limited than it was in 1989.

P. Smithers is still going strong running a boutique research firm focusing on Japan and he appears on Bloomberg UK once in a while.

http://www.bloomberg.com/video/tech-check-up-taking-the-pulse-of-the-ind...

tok1's picture

The US prob has s lot to go. It topped out in 2000 and then went down / sideways for 14 years so it's only 15% about 2000 highs.

Whats interesting is the catalyst for the fall they implied was an excessive weak yen that would cause inflation / rate rises, which could again be Japan's problem again .. If it keeps weakening

tok1's picture

The bubble is in Japanese and EU bonds this time .. japan 0.31% 10y after a 45% currency devaluation from 75 to 121.. Sounds like a bubble .

MATA HAIRY's picture

check your numbers

Robert_manboobs_ Paulsen's picture

The thing you may be missing here is that with the Global Devaluing of Currency stocks should actually go up.  Stocks are not cash, they represent companies curent holdings (which cash is a marginal part of for most) and future earnings.   those future earnings are based on the sales of commodities and services, which CAN increase with inflation (though we may see a short term hit, depending on the speed of the increase.) IE KMB can charge 60$ a roll for scotts tissues.   Therefore if the REAL value of cash is a 1/1,000,000th of what it was, shouldn't the long term outlook for stocks be 1,000,000 times higher?  The debt companies have taken on will cost effectively nothing. 

The average american will pay a much higher cost as it takes far longer for inflation to be felt in paychecks, than in companies pricing paradigms, so hedging with some gold, farmland, and real estate makes sense.

That said, I think we could see another 2008 type scenario but this time in bonds.

 

Robert_manboobs_ Paulsen's picture

The thing you may be missing here is that with the Global Devaluing of Currency stocks should actually go up.  Stocks are not cash, they represent companies curent holdings (which cash is a marginal part of for most) and future earnings.   those future earnings are based on the sales of commodities and services, which CAN increase with inflation (though we may see a short term hit, depending on the speed of the increase.) IE KMB can charge 60$ a roll for scotts tissues.   Therefore if the REAL value of cash is a 1/1,000,000th of what it was, shouldn't the long term outlook for stocks be 1,000,000 times higher?  The debt companies have taken on will cost effectively nothing. 

The average american will pay a much higher cost as it takes far longer for inflation to be felt in paychecks, than in companies pricing paradigms, so hedging with some gold, farmland, and real estate makes sense.

That said, I think we could see another 2008 type scenario but this time in bonds.

 

huggy_in_london's picture

Not if prices (assets, goods, etc) are deflating faster than the ccy is devaluing.  

Robert_manboobs_ Paulsen's picture

The thing you may be missing here is that with the Global Devaluing of Currency stocks should actually go up.  Stocks are not cash, they represent companies curent holdings (which cash is a marginal part of for most) and future earnings.   those future earnings are based on the sales of commodities and services, which CAN increase with inflation (though we may see a short term hit, depending on the speed of the increase.) IE KMB can charge 60$ a roll for scotts tissues.   Therefore if the REAL value of cash is a 1/1,000,000th of what it was, shouldn't the long term outlook for stocks be 1,000,000 times higher?  The debt companies have taken on will cost effectively nothing. 

The average american will pay a much higher cost as it takes far longer for inflation to be felt in paychecks, than in companies pricing paradigms, so hedging with some gold, farmland, and real estate makes sense.

That said, I think we could see another 2008 type scenario but this time in bonds.

 

Bunga Bunga's picture
Princes of the Yen: Central Banks and the Transformation of the Economy

How the central banks create economic, political and social change. Why was LTCM bailed out, but not Japan in the early 1990s? Who rules the world?

https://www.youtube.com/watch?v=p5Ac7ap_MAY

LooseLee's picture

"investors and talking-heads"----aka BULLTARDS

thegekko's picture

Someone has made a typo.

The article states, "The Japanese stock market reached its all-time-high on December 29th 1998,......", they just got the last two digits back-to-front, everyone knows their market peaked in 1989.