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The Story of JPN and US

July 2, 2010

In the decade of 80’s, US went through one of those go-go times of stock market exuberance. Having emerged from the lost decade of 70’s, into the ushering euphoria of a stunning bull market, is strong enough to stun even the most bullish of analysts.

1980’s was a different time. 80’s was the time of the eponymous Wall Street and the PC, of bull market and euphoria. Japan was the newest kid on the block, and slowly but surely the attention of US economy was unflinchingly bored on Japan’s economy. Toyota and Sony were the newest kids on American markets, having entered mostly in the later years of 70s.

There was a common conception, that Japan has taken “the baton” from US. Japanese cars were selling like hot cakes, and the general start of the rot in American carmakers which we are seeing today,started at around that time. But nobody felt threatened as, people today are feeling ,about India and China, because Americans knew “Jappos are one of us” .After all,”Japan is just another place our fellow Americans are there”. If anybody is benefiting, they thought its them. So no issues.[ Japan was and remains to be one of the most strategic and largest American Naval base outside America. Due to the extensive trade treaties,one of the largest trading partners of Japanese were Americans]

So the economic and psychological wisdom was Japanese are the people you should be looking towards. Though, no doubt and this huge rise in exports created a flourishing stock market. Decades of pumelled Japanese pride found its outlet through the bull market of 1980s. Forget the S&P, it was Nikkei stealing the show, in terms of investor mind share.

Traders used to stay awake the later parts of the night,follow the Japanese index through telex and telephone,find the closing and bet in correspondingly the next day on DJIA. It was easy. Spot the behaviour, bet the ranch. And yes, stay long!

Each bull market comes on the back of credit. Credit expansion as they say, and Japanese went all out on a credit expansion spree. Japanese are very sentimental about debt, mind you.We orientals, all are. But Japanese are more so. But debt is a debt when you borrow from others right? What is, a debt if you borrow from your own family members. So Japanese borrowed heavily internally. They piled on huge, extremely huge levels of debt and kept on loading it. Banks were the creditors. Japanese government was the sundry debtor.

But even the best of the parties has to come to an end. Its tiring after all,to dance to rock and roll all night,all day. By the way, it was late 80s, NIKKEI went parabolic. Dow went near-parabolic as well. And then suddenly fears of slowdown started appearing. The credit rise, brought other countries into a small patch of bull market themselves. Small pockets of prosperity across the world started popping up. Malaysia, Thailand,  Spain etc etc.

So, the other emerging economies, I believe immediately had a competition with Japan, (silent competition though) for the same investment capital.Reasons though, there are many and we can talk about them,till WordPress servers crash, but the end result was parabolic growth seldom sustains.

And yes,it was soon followed by a run on the bank. Japanese banks of course. Not only one “run” but a simultaneous one on almost all major ones. Suddenly credit dried up. Japanese banks started going belly up, and the government, aah! the government. The government in its naivety believed, any problem can be wished away by throwing enough amount of money on it. Well, throw they did, and it went away. The money that is. Not the problem!

NIKKEI tanked in 89, and this chart tells a lot of the story better than me. And yes, take a look at DJIA as well.

While NIKKEI, entered a loong loong double decade of L-shaped recovery(no recovery at all), Americans kept chugging along.Japan entered deflation, coupled with massive undervaluation of Yen, coupled with dizzing levels of internal debt etc etc.

NIKKEI

DJIA 1980-2000

DJIA 1985-2000

Slowly their mass behaviour of checking NIKKEI prices overnight and trading on basis of that subsided as well. 80s came to an end, and with the fall of the Japanese markets, US entered a period of a 3 year long mini bear market. 1990-1992. Wont really say, a bear market in traditional sense as in absolute decimation of value, but a period of time when folks lost all interest from the markets.

Its important to have such periods. Period. (pun unintended).

Would urge you now, to reread this post again,and replace “US”, each time you read the word “Japan”, and “India” each time you come across the word, “US”.

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