October 13, 2023

My 30-something niece recently returned from a multi-week vacation to Japan. Visiting that country, primarily to see Tokyo, had long been one of her bucket list items. Before she left, I was able to sit down with her and preview her itinerary and share some of my admittedly limited knowledge of the country.

Not surprisingly, coming from an investment background, I pointed out that in the 1980’s, Japan was on track to become the largest economy in the world – overtaking the venerable United States of America’s economic juggernaut. Remember, this was a time of societal malaise here in the States with double-digit inflation and interest rates, high unemployment, soaring energy prices and stagnating manufacturing gains. Not our finest hour.

Japan, on the other hand was hitting its stride, becoming the second largest economy in the world. All the more impressive considering they were still recovering from the horrific effects of World War II which had ended just a generation earlier. A sense of urgency and national pride was instilled in the populace, and they parlayed that into a common goal of revamping their economic power.

They were able to accomplish this in several ways. In the 1980’s, Japanese automakers were the first to jump on designing cars with an emphasis on fuel efficiency and design. Toyota became the de facto industry standard for manufacturing efficiencies - much to the chagrin of the Detroit-based Big 3 who had been dominant in the industry for decades and was not used to being challenged. Additionally, technology gains were also rampant as Japan became a dominant player in the nascent semiconductor industry.

Other, more subtle, factors led to their upward trajectory including a significant demilitarization of the economy, thereby pumping more money into education and national infrastructure. Also, Japan became more interested in global trade, whereas previously they had been more or less a closed economy. Demographics were also working in their favor as millions of citizens were entering the workforce in the wake of their baby boom after the war. All of which set the stage for a strong economic future.

During the late 1980’s, Japan enjoyed record-high GDP growth and became the center of emerging technologies, fashion, and youth-driven culture. The Ginza district of Tokyo – their version of Times Square – blossomed into a futuristic wonderland of limitless possibilities and endless extravagance. The Sony building in Tokyo was a veritable playground for cutting-edge gadgets. The Sony Walkman and the Nintendo gaming system, for example, came from Japan during this time, and soon hit the shores of America providing Japan with billions of dollars of export profits and vaulting them to the economic pinnacle.

As their economy took off, naturally, the Japanese stock market followed suit. The Nikkei Index, essentially Japan’s version of the S&P 500, rose at an annual average rate of over 30% from 1985 to 1989. This rise, coupled with a surge in real estate prices, created a “bubble” economy that few saw coming. Additionally, demographic pressures came into play as the population began aging in the 1990’s as birth rates declined.

If you can believe it, as of today, the Nikkei Index has still not returned to its peak from the early 90’s. That is over 30 years of investors just trying to get back to break even. This in itself is an important lesson for investors all over the world. Stock markets of the most developed economies can enter prolonged bear markets, even if nobody expects it. And of course, that’s why subscribing to a buy and hold approach can be a dangerous way to invest—even for the long haul.

As you can imagine, my niece was not terribly impressed with my limited anecdotes of Japan – seeing as how most of these events occurred before she was even born. However, as we looked through pictures and videos of her escapades in and around the Ginza district of Tokyo it became clear that it remains a global metropolis rivaled by only a handful of cities in the world.

After my rather dry facts about Japan, my niece countered with much more interesting factoids about Tokyo:

• It is the most populated urban area in the world with nearly 40 million people.
• You are never more than 30 feet away from a vending machine.
• There are 223 restaurants in the city awarded at least 1 Michelin star.
• Foreigners enjoy tax-free shopping.

The Ginza district has more neon lights than Las Vegas and New York City combined. Even in the middle of the night, it had a purplish-pink hue which she remarked looked like a continuous sunrise.

While the Japanese stock market still has a way to go before it reaches the dizzying heights it achieved over 30 years ago, the country has enjoyed relatively strong economic conditions over the last several years and is currently the world’s 3rd largest economy – behind the US and China.

Before my niece returned from Tokyo it was not on my radar in terms of a possible vacation spot. After hearing about her adventures, though, I can honestly say it sounds intriguing. From the amazing spectacles in Ginza, to the countless dining options, to the fascinating cultural history, there certainly is a lot to be wowed by.

The article above is an excerpt from the Q3 Quarterly Market Commentary. Here is a link to the most recent issue. Complete the form below if you would like to get this emailed to you each quarter.