What Goes Down, Sometimes Stays Down
Japan is a real case example of how bad things can get when sentiment turns from positive to negative and stays negative, and why the world should be looking at it closely in these times of financial woes.
Many in the West have accepted recession now as a given, however most expect things to turn around sooner rather than later, even if an impending recession turns out to be worse than the last one in 1991.
The risk however is that the unwinding, which is still ongoing 15 months after the slide began, will continue to have economic repercussions that in turn feed on the downward pressure on the performance of companies and investments alike.
The reason why Japan is such a key case study to monitor and why global economic growth may have someway to fall still is that the full impact of falling confidence, spending and a negative outlook can, in extreme cases; take a prolonged period to rebalance.
Japanese shares took almost fifteen years to reach their bottom after the all time highs for the NIKKEI in 1989.
Only in 2003 did they start to climb, unfortunately with the country now effectively back in a recession the market returned its worse monthly performance ever in October, dropping 24% – the worst performance in its 58 year history.
Having dropped below 7,500 the NIKKEI was back were it was in 1982 when Men At Work and Moving Pictures were topping the charts and Japanese electronics giant Sony had just released the Walkman for people to play their tapes on.
Property prices in Japan are still two thirds below what they were in 1989 – almost twenty years ago.
In defence of the global move by governments to restore liquidity and confidence is that the action has been ten times more swift and transparent than the inaction of the Japanese Government in the early 90’s and the culture of secrecy that the banks hid behind.
What is clear however is that investors in the US, UK or Australia should not automatically expect either share prices or property prices to defy the basic laws of economics.
Nicholas Christian says:
What many don’t understand is that relative to price, ‘value’ is not considered in reference to the Japanese economy. House prices and the share market in the 1980′s had an extrodinary rise, it was considered the ‘China’ or BRIC of the 1980′s.
Prices of Japan’s assets rose to extrodinary hight’s capriciaously well above thier ‘intrinsic value’ and as the laws of economics dictate the eventually everything reverts back to the mean long run average. This can take a matter of months, years or even decades, it all depends on how far above the ‘intrinsic value’ prices continue to rise and whether the story was ‘oversold’ this can occour to individual prices or multiple asset classes as a whole giveing the illusion to the investor that Japan was the ‘next big thing’ ‘Value’ is relative to the price and Japan prices went well into the stratospehere leaving value for dust.