…post-1989 Japan.

There are very clear cultural similarities between today’s US and Japan back then, and now, for that matter–deep nostalgia among older conservatives for a lost 19th-century past, belief in the “sacred” nature of the homeland, widely held anti-woman, anti-immigrant and anti-minority group stances. History shows us what all this has brought Japan–a third of a century (and counting) of economic stagnation and a loss of relevance on the world stage.

But these similarities are not what I mean.

In 1985, Japan’s international trading partners forced a doubling of the exchange value of the yen vs the dollar from 250/1 to 125/1, ushering in the short-lived endaka (high yen) era. This triggered a collapse in the profits of the export-oriented industries that had been Japan’s growth engine–which, of course, was the whole point of the revaluation. The Japanese central bank lowered interest rates to near-zero to try to compensate. In addition to this stimulus, the revaluation caused the worth, measured in foreign currency, of domestic assets–bonds, cash, property, streams of yen income–to skyrocket. And the ultra-low rates caused PE multiples for everyone not an export-oriented manufacturing stalwart to explode.

The Topix index tripled between 1985 and the end of 1989, with the currency gain lifting the US$-denominated result to 6x.

As time passed and all the reasonable stocks had gone up a lot in price, and encouraged by ultra-low rates, the Tokyo market took on a more and more speculative tone. Toward the end, “story” stocks, increasingly more preposterous, began to dominate trading. Corporations began to issue large amounts of bonds to get money they turned over to brokerage house asset managers–by no means the best/brightest–to invest in Japanese stocks, and who basically lost everything in loony speculation.

And then the head of the central bank popped the bubble by starting to raise interest rates in 1989. The market fell by over 30% in the ensuing 12 months.

finally, my point

Faced with staggering losses, corporate Japan decided to cover them up rather than disclose the damage managements had done to themselves and their shareholders.

My worry is that the same thing could easily happen here. We’ve already seen this with Lehman during the 2007-08 housing crisis, with the then infamous “Repo 105,” similar to the Japanese “tobashi.”

I don’t expect the extremes, or the oddities, we saw in Japan in the 1990s:

–a major commercial bank in Tokyo, for example, manufactured fake financials to show to government regulators and hid the real, loss-ridden ones in a nearby women’s bathroom–on the idea that the regulators would never allow a woman to become a member of an important audit team. That belief turned out to be incorrect. or,

–Olympus hired a foreigner as CEO to modernize operations. While investigating a set of mysterious billion-dollar-plus balance sheet entries, apparently involving a bogus, yakuza-linked acquisition made to cover losses elsewhere, he was summarily fired. He immediately fled the country for the UK, where he reportedly asked for police protection because of death threats he had received.

I also think any big problems will be centered in private equity or hedge funds, rather than in publicly traded equities. I worry a bit that large retailers may still be stuck with excess inventories that have been treated in an over-generous way on the balance sheet. But such issues should be gradually fading away. And almost anyone may now regret over-aggressive expansion carried out during the pandemic.

All in all, I think it’s a time for simple ideas and low valuations, rather than swinging for the fences with exotic new things.