By Andrew Beattie
When: 1989 - Ongoing
Where: Southeast Asia but primarily Japan
Percentage Lost From Peak to Bottom: 63.5% as of 2003.
Synopsis: The Japanese have an uncanny ability to enhance what they adopt from the Americans (market economy). Sadly, the Japanese have picked up on crashes as well and made theirs a lot bigger than any one historical American crash. The crash of the Nikkei has morphed into a massive, surly bear that attacks any signs of recovery. It all started with the a boom/bull market of the 1980s….
The Japanese economy gained extreme strength after its long recovery from the war and the atomic bombs. By coupling with the other emerging southeast Asian economies to form an unstoppable economic force, Japan seemed to create a flawless realization of Keiretsu. The phrase Japan Inc. was coined to describe how Japanese economy, business, and government were intertwined. Businesses from all over the world were sending representatives to try and find out how Japan was gaining its success. In true business fashion, the Japanese built an industry around visitors with company expense accounts and profited off the corporate spies. Soon, the Asian economy became an alternative for investors who were recently bruised by 1987.
Between 1955 and 1990, land prices in Japan appreciated by 70 times and stocks increased 100 times over. Trading became the national sport, and the Japanese jumped into the market with more blind confidence than that of the Americans of the 1920s. During the eighties, large Tokyo firms were worth more individually than all their American counterparts combined, and Japanese golf courses were worth more than the value of all the stocks on the Australian exchange.
Investors may have realized Japan was becoming a bubble, but it was believed that the high level of collusion between the government and business could sustain the growth forever. But an inverted growth cycle perpetuated itself when landowning firms started using the book value of their land to buy stocks that they in turn used to finance the purchase of American assets (Rockefeller Center is 80% owned by Mitsubishi Estate Company). Like the prosperity of the Roman Empire, the prosperity of Japan proved to be its undoing as ccorruption began to spread throughout the political and business realms.
The government sought to excise the tumor and put a halt to the inflammatory growth of stocks and real estate by raising interest rates. Regrettably, this didn't have the slow soothing effect on the market that the government hoped. Instead, it plunged the Nikkei index down more than 30 000 points.
The bursting of the Asian bubble nearly took out the American economy as well, but the measures enacted after 1987 sopped the avalanche of program trading. We learned at least one lesson from all of these crashes: humans may overact frequently with small effects, but computers do it only once in a big way.
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