The Nikkei 225's "melt up" has caused it to break back above levels last seen during Japan's bubble era. It was a time when Japan Inc. was buying up the world, and it was said that the land under the Imperial Palace in Tokyo was worth more than the entire state of California.
The Nikkei crossed 30,000 this week for the first time in more than 30 years. It now stands at 30,292, a level last set in July 1990. At that time, the Tokyo market was well into a meltdown that saw its entire value cut in half. Between late December 1989, when the Nikkei peaked at an all-time high of 38,916, and September 1990, the world's second-largest stock market fell 46.1%. Tokyo stocks lost more than US$2 trillion in market value.
The bubble days were epitomized by aggressive international expansion by Japan Inc. In Japan's corporate heyday, it was the fictional Nakatomi Corp. holding its Christmas fiesta at Nakatomi Plaza in Los Angeles when grizzled NYPD detective John McClane decided to gatecrash in Die Hard (1988). For Rising Sun (1993), it's at the grand opening of the headquarters of Nakamoto Corp. in Los Angeles that the boardroom meeting table becomes the murder scene of a call girl investigated by grizzled retired detective John Connor, the "old Japan hand" called in to investigate alongside LAPD detective Web Smith.
They're hardened, jaded, gold-at-heart Anglo Saxon cops just trying to make sense of it all. The cops stand in stark contrast to the gaudy backdrop of ostentatious foreign nouveau riche wealth, the company names and locations interchangeable.
Those days of "the Japanese are coming" have been substituted very effectively by "the Chinese are coming." Or at least, they were. We saw China's largest corporations embark on a leverage-backed binge in the second half of the last decade that saw them buy up as many gleaming Western skyscrapers as the Japanese had three decades ago. The Beijing government has broken up the party, leaving debt-fueled conglomerates such as HNA close to collapse.
The movie critic Roger Ebert had a nice piece of insight that I dug up in his review of Rising Sun. The Sean Connery/Wesley Snipes buddy cop movie does its best to explore differences between Japan and the West. Connery's character spouts enough gnomic lines, supposedly inspired by his time in Japan, to make him wiser than Mr. Miyagi.
"What perturbs us the most about competition with the Japanese, I sometimes think, is that we don't resent their methods - we envy them," Ebert says. "Descriptions of Japanese business tactics are almost always linked with gloomy musings that we should be doing the same thing."
There's an undertow of jealousy in the movies that Japanese companies are so damned good at technology, real-estate investment and turning a profit. So suspiciously good at it that they must also be up to no good. (It's hardly a spoiler to point out the ultimate bad guys turn out to be a German thief and an American lawyer.)
So where does Japan stand today? It is humbled, chastened from those heady days of the bubble boom. Japan's economy spent a "lost decade," or two, mired in deflation, falling prices, high rates of household savings, and a refusal by Japanese companies to spend the coffers of cash that built up on their balance sheets. It did not make sense to spend heavily on capital outlays or to buy expensive household items if you only expected prices to get cheaper next month, next year.
Japan is also more mature as an economy. Although the excess of Japan's bubble days was extreme, most economies have a tough time in the transition between runaway double-digit annual growth of their economic infancy to developed-nation status, and calmer corporate progress.
In 1989, Japan was only 45 years into its post-war expansion, when the nation desperately needed and benefitted from the kaizen concept of continuous improvement. South Korea benefitted from a similar boom that started when Japan's bubble burst. Korean companies flourished as they took over many of the lower-end industries (cheap cars, screens and electronics) that Japan had pioneered.
In both nations, a working man (and it was nearly always a man) gave over his life to his employer, in service of the corporation and as breadwinner to his family. Japanese working culture has matured, too. Young Japanese no longer expect to join a massive corporation and have a job for life, which takes over their life.
In Korea, we have seen the stranglehold of the chaebol broken, with the head of the Samsung empire last month sent to prison for bribing the former president, Park Geun-hye, now serving 20 years for corruption. In the days of Korea's military dictators, between 1960 and the early 1990s, it was a given that the political and corporate elite worked hand in glove. The Samsung heir, Lee Jae Yong, is serving a 2-½ year sentence now. His father was convicted twice, including for bribing a previous president, but never spent a day behind bars. The father, Lee Kun-hee, eventually landed a presidential pardon - arranged with a bribe.
These economies have matured politically, economically and personally. China is only at the onset of that process. If anything, it is moving backward politically, and it's accepted that work can take up 100% of your life.
A Hong Kong business owner and friend told me this week that he did not need to give his employees in China any days off work. Work and making money consumes everything, this owner of a dental-supplies business told me. And that's seen as a good thing. Wages are high, too high, higher in Shanghai than in Hong Kong now, he said, for the front-line sales staff who make him the money. That's what they care about, not time off.
Japan has not totally shaken off its cycles of recession. Previous Prime Minister Shinzo Abe's policies of economic reform only went so far. There was only slight progress in encouraging women to join the workforce, and in freeing up immigration to provide bodies for hard-to-fill jobs. Inflation remains flat, with negative interest rates from the Bank of Japan yet to produce sustained growth.
The Nikkei didn't bottom out until a low in 2003 and an even-lower in 2009, at 7,568. It has now virtually doubled in less than a year, from 16,553 last March. That growth is too fast.
Some of this recent Nikkei rally is produced by quant traders. Many global investors are being forced to "buy Japan," having been underweight for many years. The recent appetite for growth and equities has pushed most Asian markets near or to record highs.
Systematic traders are caught in a buying upswing, their purchases of futures and equities causing the market itself to rise further, and producing more buying. There's a technical squeeze on the supply of stocks.
Nomura believes that quant buying has gone "well beyond" anything justified by the momentum of domestic demand, as represented by consumption, or of external demand, mainly for goods in the United States and China.
"It has hard to find any conventional interpretations of current fundamentals that would provide a rationale for the Nikkei 225's recent gains," Nomura macro strategist Masanari Takada writes in a research note. "Thus, it is precisely the traditional fundamentals-based investors that are probably feeling pulled into panic-buying against their will."
This "forceful push" by systematic investors is hardly unique to Japan. Trend-following quant buying is intensifying stock gains in many markets around the world. The buying may hit a pause in a couple of days, with Nomura believing past average positioning suggests the buying may "hit the saturation point" sometime around February 19. The Nikkei may consolidate then between 29,500 and 31,500. Futures positioning suggests that it may be Asian markets that first show signs of weakness, which can be watched and will surely be followed in the West.
The economic growth in Asia, however, does have a good underpinning. Share gains make more sense in this part of the world since economies are growing reasonably fast. Fast, but reasonably. We have seen hot air building once again in the Nikkei in Japan, but surely the air will not come out of it as dramatically and disastrously as it did 30 years ago.
