Japan's stock market: Nuked past & Reactive future?

Repeat after me, "Japanese stock market ka Nagasaki saki naka!"

By the end of the 1970s, Japan was the 3rd largest economy in the world, next to the USA. In the 1990s, the Japanese economy rose to the 2nd position for almost 10-15 years until 2010 as the 2nd largest economy. The island country was dominating the world with its expertise in electronics and efficient automobiles.

Despite getting nuked and losing WW2 in 1945, the Japanese economy was the fastest growing economy from the 1970s till 1990. While the American stock market did not give any returns for a decade, the Japanese stock market nearly tripled. 

It seemed akin to a dream of building a prosperous country until the 1990 and 2008 financial crises came to destroy the dream—especially the 1990 Japanese real estate crisis which threw the country’s economy into an abyss. 

Did you know that during the real estate bubble, the Imperial Palace of Japan was once more costly than the entire real estate of California?  

The comeback and stagnation of the Japanese economy

Let's get started from the beginning of the downfall - The World War II

The economic damage of WW2

WW2 destroyed Japan. It lost 40% of the nation’s industrial plants and infrastructure. An estimated 40% of the population died within a year because of the atomic blast. A survey by the City of Hiroshima revealed that 70,147 out of 76,327 buildings, including houses, stores, factories, and schools, had been totally or partially incinerated or destroyed.

According to the Municipal Handbook 1946 edition (1947) published by the City of Hiroshima, the total amount of damage was estimated to have been 763,430,000 yen (at the time).

On the other hand, a report published by the Economic Stabilization Board in 1949 estimated the total property damage in Hiroshima City was 695,000,000 yen (at the time). It was also estimated that 884,100,000 yen (value as of August 1945) was lost. Japan’s per-capita income in 1944 was 1,044 yen, meaning 850,000 people lost their annual average income. 

The comeback post WW2

Japan started to rebuild as soon as 2 days post the atomic bomb blast. They first rebuilt the infrastructure, where transportation systems were the top priority. Trains and strr\eetcars (trams and other vehicles) were rebuilt. As the transportation system was back on track, water and electricity were restored. This was followed by the reconstruction of houses, buildings, commercial properties, schools, factories, companies etc.

Amid the restoration process, the government of Japan created the Hiroshima reconstruction plan and strict policies. The manufacturing and medical sector were rebuilt because of government support. Employment started to rise as the media, entertainment, sports, and financial sector was back on track. Significant investments were made in electric power, coal, steel, and chemicals.

By the mid-1950s, production matched prewar levels. GDP growth between 1953 and 1965 was more than 9% per year, manufacturing and mining by 13%, construction by 11%, and infrastructure by 12%.

Employment in these sectors increased drastically, and Agriculture accounted for 26% of the working population. One of the essential reasons for the success of Japan’s comeback is its profound education system. One time, Japan had the highest literacy in the world. 

The Economic Boom of 1960-1990

As per the report on Productivity and International Competitiveness in Japan and the United States (1960-85) - By comparison petroleum and coal products in Japan were only 1.6 times as expensive as those in the United States in 1970, while electricity and gas were only slightly more expensive in Japan than in the United States in that year. 

Japan, the world’s third-largest economy then, saw its stock market grow in value while the USA’s stock market did not perform. Despite having an economic downturn in the USA, Japan’s economy managed to grow at a steady rate of 5-7% annually. Due to the oil shocks (1973 and 1979) caused by middle east instability, the oil prices soared 10 times, making inflation rise.

The first oil shock created trouble for both the USA and Japan, but the 2nd time, the Japanese not only were able to evade the problem partially but also recovered quite quickly. This was possible because of several reasons:

• Japan’s industrial shift from heavy industries to light industries

• Decrease in oil consumption and focus on energy-efficient industries 

• High funding for Japanese corporates 

• High household saving rates 

• High domestic sustainability and demand 

• Effective policies by the government

• Developed infrastructure 

• High exports

But this economic daylight period brought a shadow with it. 

The Real Estate Bubble 

Due to a relaxed monetary policy and high exports, Japan had a trade surplus. The banks granted easy credit to corporates and the public. Also, the household savings were high and stimulated people to buy more, thus pushing up the demand in the economy. This led to increased money circulation in the economy. 
With people having excess money in their hands, lucrative investments got attractive. Speculation was inevitable, particularly in the Tokyo Stock Exchange and the real estate market.

The Nikkei stock index hit its all-time high on 29 December 1989 when it reached 38,957. Real estate tanked throughout the 1990s, collapsing by 70% by 2001. The housing, stocks, and bonds rates rose so much that the government issued 100-year bonds at one point. During the 1990s, real estate in Japan was valued at over 2,000 trillion yen, 4x the value of real estate in the US. Nikkei, after hitting its all-time high, started to collapse.

Within 9 months, the Japanese stock market plummeted by 50%. The economy tanked, and the country went into recession. As a result of a prolonged decline in asset prices, there was a sharp decline in consumption, which resulted in long-term deflation in Japan.

From a positive economic (GDP) growth rate of 4.9% to a negative -0.5%, the Japanese economy went downhill for 3 years. In 1994, the economy started to display positive economic growth. Until 2000, the economy was stagnant. Then came the dot-com bubble burst, which negatively impacted the Japanese economy. Amid recovering from the economic damage, the 2008 financial crisis occurred, another lethal blow to the Japanese economy. And the worst of all, covid situation.

Reasons for the asset price inflation:

• Poor monetary policies and late actions from BOJ (Bank of Japan)

• Overflow of money supply

• Speculation, insider trading, currency manipulation - Yen, corruption 

• Inefficient banking system - large NPAs, easy credit availability  

• Perpetual taxes and laws

The Bottom Line

To this day, the Nikkei index has not managed to meet the 1990’s all-time high. Basically, for 30 years, the stock market of Japan has been stagnant. The economic growth has slowed down since the bubble burst. Japan is also facing other social demographic problems, which are most worrying as bank policies cannot solve them.

Japan’s working-age population (ages 15 to 64) is expected to plummet to 55.2 million in 2050 from 81.2 million in 2010, a 32% decline, according to UN data. Also, the suicide rate in the country is increasing. People are not happy with their lives. Daunting work hours along with a toxic environment have put people into depression. 

As every problem has a solution, this problem will also get resolved. The only prerequisite is optimism, integrity and action.