Great Stock Market Crashes | Japan's 20 year Bear Market

By Mike Rowan

The Nikkei 225 Crash and Asian Panic Started in 1989

When: 1989 - Ongoing

Percentage Lost From Peak to Bottom: Nearly 80% as of Spring of 2009.

20 year Bear Market?

Can a bear market last for 20 straight years? Well, this is exactly what has occurred in Japan, starting in 1989.

The Japanese have an uncanny ability to enhance what they adopt from the Americans, but 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 been so extensive, that any short lived recovery is followed by another pronounced bear market. It all started with the Japanese Bull Market of the 1980s….

Japan After World War II

After World War II, Japan was devastated-several of its major cities were obliterated and its economy was virtually nonexistent. Due to much effort and hard work, the Japanese economy slowly began to stabilize and recover. Additionally, the United States helped Japan rebuild, and provided capital and military protection, as well. The value of military protection should not be overlooked, as this is usually the highest expense of any government. This benefit allowed the Japanese economy and government run more freely and efficiently.

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 keiretsu philosophy was one of cooperation, where all facets of business and government worked hand in hand. As the Japanese stock market soared, the keiretsu even purchased each other’s shares.

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.

Tremendous Japanese Growth

Unbelievably, land prices in Japan appreciated by 70 times and stocks increased 100 times over between 1955 and 1990,. Trading became a national craze, and the Japanese jumped into the market with more blind confidence than that of the Americans of the 1920s before the onset of the great depression.

American investors probably remember the sentiment well. I remember well when everyone joked that the Japanese were doing a peaceful takeover of our country by buying up all of the land and real estate. It seemed as if every major property, building, and golf course were owned by the Japanese.

Nikkei 225 Bubble Begins to Burst

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. However, like the prosperity of the Roman Empire, the prosperity of Japan proved to be its undoing as corruption 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.

If there is one lesson to be learned by the long arduous decline of the Nikkei 225, that is that market down turns are not necessarily over in a year or two (Or 20). This comes as our own stock market is showing signs of digging out of the mortgage crisis, and pundits are proclaiming that this is the start of the next American Bull Market. Hopefully that is the case, however, the lessons taught by history are too often ignored.