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The Nikkei Bubble
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.
Factories were quickly built and peasants became factory workers. Middle and upper
class men became white collar workers, called salarymen. Salarymen and factory
workers were offered lifetime employment. This caused salarymen to have fierce loyalty
towards their employers. Most Japanese workers at the time were highly frugal, saving
much of what they earned. Many companies merged together to become large industrial
and banking conglomerates, called zaibatsu.
The zaibatsu gained their competitive edge by copying and improving Western products
and selling them for much cheaper. The cheaper products won Western customers and
started to hurt US companies. Tremendous economic growth occurred allowing the
zaibatsu to evolve into even larger business alliances, called 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 purchased each other’s
shares.
In the 1970’s, the oil crisis and inflation crippled the global economy. Most American
cars had large gas guzzling V8 engines, which cost a fortune to run. Japanese car
makers, such as Honda, quickly mobilized to produce small fuel efficient cars.
Additionally, these cars cost a fraction of the price of American cars. These cars were
quickly increasing in quality, as well. Even as early as the 1960’s, Japanese cars were
being assembled with robots, making human error almost nonexistent. This started the
decline of the low tech American automobile industry. Throughout this entire boom, the
Nikkei stock average was soaring to new heights.
By the 1980’s, Japan added electronics to its list of specialties. Japanese keiretsu
corporations, such as Hitachi and Sony, copied and produced quality electronics
hardware needed by the growing computer industry. Japan trounced American
companies, due to its ability to compete on price, aided by robots and cheap labor. With
the exception of microprocessors, Japan dominated the market for all chips, circuit
boards and other components. It was widely believed that Sony and Hitachi, would
eventually acquire Intel and IBM.
Throughout the 1980’s, Japan became viewed as a utopia, due to its people having the
highest quality of life and longest life expectancy. In addition, Japan was the world’s
largest creditor and had the highest GDP per capita. Many Americans feared that their
workforce would become obsolete due to the use of robots in Japan. With the economy
booming and the stock market climbing, Japanese corporations crammed many
skyscrapers in Tokyo and Osaka. This caused real estate prices to skyrocket as well.
Between 1986 and 1988, the price of commercial land in greater Tokyo doubled. Real
estate prices soared so much that Tokyo alone was worth more than the United States!
Between 1955 and 1990, land prices in Japan appreciated by 70 times and stocks
increased 100 times over. An average home near Tokyo cost well over $2 million in
1989. Large scale stock speculation occurred causing a worldwide mania. Investors all
over over the world were vying for Japanese shares. These euphoric investors believed in
the fallacy of a perpetual bull market. Luxury goods were purchased in large numbers by
the newly wealthy.
Unfortunately, all excessively good things must end. To cool the inflated economy, the
Japanese government raised rates. Within months, the Nikkei stock index crashed by
over 30,000 points. At its height, the Nikkei stood at 40,000. The Nikkei could crash
this far because its value was inflated on false hopes and hype, not solid financials.
Eventually, many scandals came to light showing the corruption that always occurs in a
bubble’s heyday. Japanese housing prices plummeted for 14 straight years, and may
continue in the future. The Nikkei sank until its low of 8,000 in 2003. The Japanese
government and corporations are still suffering under unwieldy debt loads gained since
the late 1980’s. This debt was used for stock speculation and buying overpriced land.
Even today, in 2004, the Japanese economy is still in the doldrums.
Once again, we have seen the development of a bubble and the inevitable stock market
crash that always follows it.
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