Japan’s bear market is a lesson in ‘exuberance’

TOKYO (AP) — Giddy American investors flush with stock profits don’t have to peer into a crystal ball to find out what a bear market looks like. All they need to do is look at Japan.
It was a little more than seven years ago that the Nikkei stock index, Japan’s version of the Dow Jones industrial average, hit a record high of 38,915 points.
“The dominant view in the stock market is optimistic,” the Asahi newspaper reported at the end of 1989. “Players see the momentum continuing in the new year, and the index reaching 45,000 by the end of next year.”
That never happened.
The Nikkei started plummeting in January 1990, and didn’t stop until it had lost 63 percent of its value by August 1992. Even worse, the market went on to suffer from a protracted malaise and now stands just above 18,000 points.
Even if this isn’t a warning for the United States, Japan’s stock market offers a lesson in the perils of what Federal Reserve Chairman Alan Greenspan has described as “irrational exuberance.”
“Look at it — no energy whatsoever,” said investor Kei Kimura, jabbing his finger toward the Tokyo Stock Exchange floor Wednesday. Many brokers stood around chatting, and exchange employees sat quietly at their desks with few trades to process.
“It wasn’t like this in the old days,” said Kimura, a retired trading company employee. “Then there was such commotion! We used to have a billion shares move a day,” compared with just a few hundred million most days now.
The Japanese stock market’s problems extend far beyond the world of traders and investors. They are seen as confirmation of a national economic slump that shows little sign of ending and has had a profound impact on society.
Lifetime jobs are a thing of the past. A country that prides itself on its saving habits now questions the soundness of its banks, where hardly any interest is paid on deposits. Investments for retirement have been lost.
With gains each year in the 1980s, Japanese brokerages began touting stocks as a can’t-lose investment.
Brokers set up counters at department stores. Housewives and retirees flocked to transfer their hefty savings to “safe” bets like NTT, the privatized telecommunications monopoly that doubled in price in its first two years.
The Nikkei average surged 40 percent in 1988 and an additional 29 percent in 1989 — uncannily similar to the Dow Jones industrial average’s rise of 33 percent in 1995 and 26 percent in 1996.
Japan’s bubble extended beyond stocks to land and other assets — such as the modest Van Gogh painting that one Japanese industrialist thought was worth $82.5 million. Banks dangerously overextended themselves with loans to real estate speculators.
When the bubble burst, the slide was anything but the temporary pause many expected.
The government used hundreds of billions of dollars to stimulate the economy, with only temporary results. It is accused of dragging its feet on reforms that could revitalize unproductive sectors such as banking and agriculture.
“When the fundamental structural problems are not rectified quickly enough, the market can remain laggard much longer than anyone expected,” said Mineko Sasaki-Smith, economic research director at CS First Boston (Japan) Ltd.
Banks, for instance, have sat on their huge piles of bad loans, making them reluctant to lend to risky new ventures that could boost the economy and the stock market. That’s considered less likely to happen in the more rough-and-tumble U.S. version of capitalism.
When the United States went through its last recession, the U.S. corporate sector “did ruthless and bloody downsizing, streamlining, creating a lower cost base,” said Andrew Shipley, an economist at Schroders Japan. “It doesn’t appear that Japanese companies are willing to bite the bullet and start downsizing.”
Pessimism about the Japanese economy’s longer-term prospects has sent the Nikkei tumbling 12 percent since mid-December, and stocks in the most sheltered and change-resistant industries have been hardest-hit.