Then VS Now - Is The Japanes Asset Bubble Happening All Over Again?

in hive-175254 •  3 months ago 


A lot of people are predicting the worst bubble of all bubbles during the current situation. They call it the mother of all bubbles and comparing it with Japan’s bubble from 1991. This motivated me to take a closer look at both situations. In this article we will discuss the similarities and Differences between the Japan asset bubble between 1986 and 1991 and the current state of the market.

Japan’s Bubble vs Current Stock Market

Let’s start by comparing the two economical situations and the state of both indexes. In the early 1980s Japan’s central bank lowered the interest rates. This resulted in a true boom which made almost every asset raise into the extreme. Real estate and stocks were trading at a Price to earnings ratio of 60 at the highest point. This could have been avoided because the Japanese Central Bank had the chance to increase the interest rates throughout the process. But because the US economy was struggling at that point, the Japanese wanted to secure their economy and continued to keep the low interest rates. This was one of the worst mistakes they could have done at that moment. When they finally started to raise interest rates again, it was too late. The prices got so high that nobody would be able to afford any real estate or even stocks. Therefore, when the interest rates started to increase and demand started to drop the prices started to fall like a stone. This lead to a very nasty downwards spiral which the Japanese economy could not recover until today.


Now if we compare this situation to the current US situation, many people could see many similarities. Just like Japan the US had very low interest rates for a long time now. The charts even look very similar. Therefore, many people are predicting another very bad outcome for the US economy. The US also had the chance to increase the interest rates at one point, but decided to keep it low, because of the wat and still big amount of COVID cases despite the good state of the economy. Many experts even suggested that the FED was sleeping on the wheel and started tapering way too late as Inflation hit very high numbers in a long time. But is it really the end? Are we really getting a crash that has never been seen before and do we really never recover from this?


Differences In Economies

In order to answer these questions we need to take a look at the differences of these economies. On the one hand we have Japan which GDP is declining year over year. The reason for that is that the work force is getting older and the Japanese government is not allowing many foreigners to work in Japan. On the other hand we have the US that is allowing foreigners and a lot of experts into the country to support the economical growth and therefore also the GDP.

Another factor to consider is the aforementioned Price to Earnings Ratio. For Japan it was around 60 at one point. In our current case it is around 20. This is still very high but no where near the 60 of Japan. And considered that the average P/E ratio of the S&P 500 is around 16 we are really getting some perspective on this one.

Last but not least, both countries are very export dependent. But while Japan is a very small country that is also heavily dependent on energy import, the US has better resources and more land to use. This means that in hard times the US is less dependable and can somewhat supply its own country while Japan had really a hard time to get its industry running.

Another point that should not be forgotten is that the US Dollar is the current reserve currency. And yes, it is on the decline right now but it still has more power than the Japanese Yen ever had. This is why it is very hard to compare both situations if we truly look into the details and not just at the graph.


All in all, we must admit that we are currently in a very tricky situation. It looks like the crash we are heading towards will not be pretty and the chance of a lost decade is not unlikely. On the other hand I do not think that a potential recession could crash the US market as hard as it crashed the Japanese economy in 1991. I truly believe that we will see a new All-Time High sooner or later in the S&P 500. Furthermore, even if we would see a lost decade, it is still possible to be profitable in such times. Usually, people ae not just investing at one point of time and then stop. The best way to spread your own risk is to use the dollar-cost-averaging method and invest a certain amount in equally spread periods. This way you do not have to worry about any crashes or bear markets as this system was the best method over the past decades.

Published by ga38jem on
On 12th June 2022

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Hi @ga38jem

To tell you the truth - I never exactly understood what happened to Japanese stock market in the past and why it took "forvever" to recover.

A lot of people are predicting the worst bubble of all bubbles during the current situation.

Based on my life experience (limited for sure) - real problems start when liquidity runs out. And with amount of "money" being pumped into economies and financial systems -> I would actually expect that all that liquidity will last quite a bit.

Another point that should not be forgotten is that the US Dollar is the current reserve currency.

Exactly. Comparing Japan to US doesn't seem to make much sense to me. USD is a global reserve currency and this allows US to "export" their inflation to the rest of the world. Japan never had that luxury.
Wouldn't you agree?

Last but not least, both countries are very export dependent.

Correct me if I'm wrong, but doesn't US mostly export their own FIAT currency?

Cheers, Piotr

Thank you once again for sharing your thoughts! :)

Yeah the Japanese bubble is a true mysterium but it is interesting to read about what happend back in the days.
Yes I would completely agree that comparing both economies is very difficult.

Another point that should not be forgotten is that the US Dollar is the current reserve currency.