"But the truth remains that few ever recognise the early stages of exuberance as attention is typically being diverted the other way."
Some food for thought from history...
At its peak Japan’s equity market constituted 42 per cent of global market capitalisation and Toyota was making more money from trading derivatives than selling cars.
Shares in the elite Industrial Bank of Japan rose sixteen fold between 1984 and 1989 to a price/earnings ratio of 170 times. It did not matter that IBJ’s free-float was just four per cent – a $130bn market cap ($250bn today’s money) transformed its appetite for risk.
Infamously, IBJ got involved with Osaka hostess-turned-restaurateur Nui Onoue, who channelled stock tips to her sponsors via a giant ceramic toad in weekend séances. The “Dark Lady” became the world’s largest individual speculator until the market collapsed and the $20bn she had borrowed was found to have been fraudulently obtained. She took down the bank’s chairman and two small lenders, ending up with a twelve-year jail sentence and personal debts exceeding $3bn.
Property prices were out of this world. With Tokyo fast becoming an international financial centre, it was claimed that 250 super high-rise buildings would need to be built. Prices were marked up to the point where the capital’s landmass was worth more than Canada and the value of its Imperial Palace grounds – which you can run round in about 40 minutes – could buy the entire state of California. The government’s Management and Coordination Agency valued Japan’s land at ¥2,000tn – $15tn at the time, or about four times that of the US with twenty-five times the area.
In a Japanese version of tulipmania, golf club memberships were traded like stocks. Koganei Country Club to the west of Tokyo cost over $3m to “join”, plus green fees. Organised crime could not resist getting in on the act. Ibaraki Country Club turned out to have minted around 52,000 subscriptions rather than the 2,830 officially sanctioned.
The urge to splurge pervaded every facet of life and reached across the globe in the form of tourist spending and the acquisition of trophy assets, some of which were national icons. Naïve students embarked on the study of Japanese as a short-cut to riches.
Then when the Bank of Japan called time and the bubble began to deflate, everyone watched in disbelief as layer upon layer was painfully peeled back and the mess of what had really been going on became plain for all to see.
Source: Deutsche Bank