Written by Peter Churchouse, Stansberry Churchouse
It was one of the biggest stock market and asset price bubbles in modern history…
I’m talking about the Japan economic bubble that burst in 1992.
From 1986 to 1991, the country saw staggering valuation explosions, totally detached from reality, across equities and real estate assets.
From its peak in 1990, Japan’s stock market fell by more than 80 percent, hitting its low in 2009. Even today it’s still over 40 percent below its previous top.
By comparison, it took the S&P 500 less than seven years to surpass its global financial crisis highs. The index is now 65 percent above its previous pre-Global Financial Crisis peak.
Now, after several “lost decades”, Japan’s market is finally ready to catch up to the rest of the world.
The Japan economic bubble
Before we get to Japan’s comeback, let’s take a closer look at what happened.
Between 1982 and the end of 1989, Japan’s Nikkei index ripped more than 400 percent higher. Stocks in the rest of Asia were not doing anywhere near as well as those in Tokyo.
One of the best ways to illustrate the craziness of the Japanese equity market bubble at the time is in the following chart. It shows the total market capitalisations of the Japanese and U.S. equity markets over the 20-year period from 1977 to 1997.
Focus in particular on the grey shaded area, which shows the ratio of the total Japanese market cap to U.S. market cap.
In 1977, the Japanese equity market was roughly 2.5 percent of the entire U.S. market – that is, the U.S. stock market was 40 times larger. But by 1988, Japan’s stock market was 36 percent bigger than the U.S. market. On a relative basis, in a little over a decade, the Japanese equity market grew over 50-fold compared to the U.S. – and substantially surpassed it as the largest market in the world.
The Tokyo real estate market was also utterly absurd at the time.
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