Stock markets in the US are very active recently. The Dow industrial average went beyond 17,000 and hit the record high last week. Stock market in Kuala Lumpur is also active, FTSE Bursa Malaysia KLCI Index was about to reach the highest last week. It reminds me the bubble economy of Japan in the end of 1980s. It was definitely enthusiasm at that time. Stocks would be going up tomorrow because it went up today. This is a story in Japan,1989.
1. Situations at the end of 1989 in Japan.
Nikkei 225 hit a historical all-time high of 38,957.44 in December 29, 1989. When I saw the screen board, I wondered why it happened because I did not find the reason for Nikkei 225 to reach the highest. In 1989, the stock market went up from approximately 30,000 to nearly 40,000. But I did not see any big news to justify that in 1989. Without a economic mechanism changed, I thought that just the only price of stocks had been going up. It was strange, definitely. At the beginning of year, a lot of economists and think tanks predicted movement of the stock markets in the year, I remembered one of economic research centers said “Nikkei 225 will reach 100,000 in the near future.” at the beginning of 1990. However, current Nikkei 225 is around 15,000, as you know. What’s the difference it is!
2. How it happened.
In 1989, I worked at one of the four biggest Japanese investment banks as a stockbroker. My main clients were retail investors, such as owners of small companies, doctors, professionals and housewives! There were a lot of economic research to analyze Japanese economy and justify this crazy appreciation of the stock market in Japan. But the reason why it appreciated was very simple. The stock market went up because everyone bought it. I talked a lot of retail investors everyday. Beginners are usually quite conservative at first, however once they realized every stock was going up and most people around them bought stocks this year, beginners also start investing aggressively although they had little experience. It is a little difficult to know how it works because it is not a normal situation. Can you imagine every housewife starts investing stocks today? In 1989, they did. I heard this phrase many times in 1989, ” He does not invest stocks as he is foolish”.
3. What happened after bubble burst?
It was miserable after the bubble burst as you know. Most investors lost their money and only debts remained. A lot of companies, including listed companies went out of the markets. The most important thing, I think, is that Japanese people lost confidence to go forward with taking risks. Emotionally, this impact was strong enough to discourage the economic growth. Everyone in Japan felt to get richer and richer until the bubble burst, but suddenly realized it was a bubble and their wealth disappeared from sight. This is the beginning of a lost decade in Japan.
It is said that human’s memory is short-lived, so bubble will appear again every 20-30 years. I would like to monitor when it happens again.