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Minyan Mailbag: Why Japan and Not Nasdaq?

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Kevin,

I'm no expert on financial history but I don't understand the frequent references on the 'ville to the Japanese bubble as compared to the Nasdaq bubble.

Weren't their banks trading at multiples akin to Nasdaq multiples, i.e. wasn't their bubble way more mainstream than our tech focused bubble in 2000?

Also, as a society and a country, Japan is vastly different than the US. Japan is culturally homogeneous which arguably has led to rampant structural corruption, not the Enron or Fannie Mae one-off corruption we've seen here. Historically, the Japanese have also been slow to admit mistakes, leading to a very inflexible financial policy approach. Wondering what your thoughts are on this?

Thanks
Minyan BH


BH-

By 1989, with the Nikkei above 40,000, Japan had seen a decade of 3.9% average annual growth rate in GDP, as well as a six-fold increase over that same period in real estate prices. In 1989, you may recall, many argued that Japan's economic fundamentals were not just sound, but representative of a new paradigm that all U.S. businesses should mimic. Many, in fact did attempt to mimic them. In Kentucky at that time I remember workshops being held around Lexington, less than 20 minutes from where the new Toyota Motor plant in Georgetown was located, specifically to advise small and medium businesses how to emulate the Japanese style of management. In short, the Asian Tiger had been fully and completely embraced.

What happened after 1989 is why I tend to focus so much more on Japan. By 2002 Japan's stock market had fallen by 75%. Real estate prices had collapsed by 80%. Consequently, what was once referred to as the Asian Miracle, a fundamentally sound economy indicative of a new paradigm, is now known as one of the worst economic disasters in history, fueled by, as you put it, "rampant structural corruption" and an inability to admit mistakes.

At least that is how it's known. As Scott's piece on Friday afternoon pointed out, causal factors are easy to uncover in retrospect. What really happened is that the psychological support fueling asset prices in Japan collapsed. Did poor business practices exacerbate that bubble? Probably. But they did not cause the bubble. The factors that caused the bubble in Japan were the same factors that cause all bubbles - human psychology. Everything else serves to either weaken the psychological support for increased speculation, or add fuel to it. That is why good news is sometimes good, and sometimes bad. And data points are sometimes bad and at other times good.

Although stock prices in certain sectors did collapse between 2000-2002, I do not believe we have experienced our "bubble" yet, thanks largely to Fed-induced liquidity. Therefore, I look at Japan to see how a society copes with a deflationary spiral, and how society's appetite for speculation can suddenly end. The Nasdaq collapse is an example of how liquidity can combine with such an appetite for speculation and stave off a larger unwind. I'm interested in how a society transitions from one of increased time preferences and extreme risk-seeking, to decreased time preferences and extreme risk aversion. Once that psychological shift occurs, no amount of Fed-induced liquidity can salvage bulging financial asset prices. In fact, the only reason the Fed's policy since 2000 has "worked" is because our appetite for speculation has remained intact. Ben Bernanke and the Fed believe otherwise, and perhaps they are right and I am wrong. We shall see.

And this is all a very long-winded way of saying that the Japan experience is an example of what happens when risk preferences change, while the Nasdaq unwind is an example of what happens when risk preferences simply shift to another asset class or other sectors.

-Kevin

No positions in stocks mentioned.

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