Bubble Nikkei

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Bubble Nikkei

Post  Ryu on Wed Nov 12, 2008 1:23 pm

Can a bear market last for 14 straight years? Well, this is exactly what occurred in Japan, starting in 1991.

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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