When will the global stock bubble burst? The higher stock markets rise, the bigger the fear that what goes up must come down. It is just a question of when. Once I asked one of my hedge fund friends how he became so rich. He answered, “I always sell too early.” So much wiser than most of us who are stuck worrying about having bought too late.
Japan’s is still the undisputed No. 1 bubble in history. At the peak, Japan’s stock market capitalization was bigger than America’s, despite the economy being less than half in size. All the valuation metrics were stretched to never-seen-before levels. For example, the Nikkei’s price-to-earnings ratio stood at 90 times or six-times above the historic average of 15 times.
Land prices rose to stratospheric levels. Famously, the Imperial Palace grounds in Tokyo were worth more than all of California. And just to get through the door of a Ginza nightclub cost ¥1 million, followed by another ¥1 million for a bottle of champagne once you arrived at your table. When the bubble burst, Japan destroyed more wealth than it had destroyed during the Pacific War.
The important point, however, is lost in the comparison of financial valuation metrics. Japan’s bubble experience is fundamentally different from other financial bubbles. This is because it was the only bubble in history that was proactively burst by the ruling elite.
Everywhere else, policymakers are typically afraid to act. Former U.S. Federal Reserve Chairman Alan Greenspan famously summed up the dominant view of global policy makers: “You can never know whether it is a bubble until it bursts. It’s up to the market to decide.”
Not so in Japan in 1988-1989. They knew it was a bubble. They knew that markets left on their own would only inflate the bubble even more. Most importantly, they were not afraid to act and do something about it — no matter how much vested corporate interests and populist politicians would protest.
Consider these remarks: “Thank you for appointing me to become your head of the central bank. Bad things are happening in our country. A graduate from the top university, entering a top company can never ever dream of owning and living in an apartment within a two-hour commute from his office. This is bad for society, this is bad for our future; this is a bubble, and I will burst it.”
This was the opening salvo of the inaugural speech by then newly appointed Bank of Japan Governor Yasushi Mieno, delivered on Dec. 17, 1989. He immediately went to work, hiking interest rates at record speed — bond yields surged from 3% to 8% within nine months of his taking office. Stock markets were even faster to take him seriously: The Nikkei peaked a mere 12 days after his speech and had practically halved by the time the first anniversary of Mieno’s inaugural speech came around.
What matters is that Japan’s ruling elite, led by the elite bureaucracy, was not afraid to go against popular opinion, vested corporate interests and free-market momentum. At the end of 1989, almost all strategists and investors surveyed predicted the Nikkei would rise to 60,000 or higher.
It is wrong to call Japan’s proactive bursting of the bubble anti-free market or socialist. After all the purpose of the market must be to nurture and enable sustainable prosperity; and if the next generation of young citizens can no longer dream of “living in an apartment within a two hour commute” then the market is failing society.
Japan’s ruling elite and technocrats are fully committed to free market capitalism, but the market must serve society. If it doesn’t, Japan’s elite technocrats are not afraid to intervene and force a correction. Technocrats’ exemplary competence, integrity and willingness to act against vested interests are Japan’s strongest safeguards against populism and the divisive politicization of all public and private life.
The proactive bursting of the bubble is a most dramatic example of how Japan’s elite is not afraid to act against vested interests. But there are many others. The medical services and pharmaceutical industry is a more micro one, with policymakers relentlessly focused on managing down the cost of medical services for consumers. Japan’s consumer price index for medical services has not increased over the past two decades.
Government ordered price controls are unafraid to redistribute pharma companies profits into better purchasing power for the people. In contrast, the fact that U.S. medical services prices basically double every seven or eight years is probably as good a definition of a market failure that one can think of.
More recently, the brilliantly staged public shaming of Japan’s telecom providers into lowering mobile phone contract prices by the prime minister is yet another example. All said, Japan’s ruling elite is not afraid to boost the purchasing power of the people rather than, at best, lazily trust the power of the market; or, at worst, favor big-company vested interests over the best price possible for citizens. There is a lot to be admired here.
Of course, the strength of Japan’s administrative state can also be a weakness. No doubt, Mieno’s purposeful bursting of the bubble deserves to be admired as one of the most daring policy goals ever set; at the same time, the severity of the consequent economic and social depression forced many unintended consequences that could have been prevented or at least managed better than they were.
The young men and women who entered the best companies in 1989-1990 may have been able to buy their one-hour-only commute apartment eventually, but they almost certainly did not have happy or prosperous corporate careers as big company Japan went from one round of restructuring to the next during the post-bubble period. And, worse, their less fortunate peers in the small and medium sized companies were never really able to get a full time job. We will never know whether the elite’s proactive bursting of the bubble brought more or less pain and hardship on society than a laissez-faire approach would have.
Still, the fact that Japan was not afraid to act and attempt to manage for the best interest of society against the tyranny and mania of the market is not just admirable, but it should be a source of national pride. While the market must always serve society, society should not serve the market alone. And in Japan, the ruling elite are not afraid to be the arbiter between the forces of free-market capital and common social capital.
Jesper Koll is the senior adviser to Wisdomtree Investments and is consistently ranked as a top Japan strategist and economist. He publishes blogs at www.wisdomtree.com/blog.
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