authored by

Colin Bracken
May 2019

Since Japanese Asset prices peaked in 1990, the Japanese economy has been plagued with low inflation, interest rates and economic growth. Could other developed nations now be falling into the same 'liquidity trap'?

The Economic Miracle

Japan enjoyed an economic miracle after World War II that enabled it to become the World’s second largest economy. From 1955-1990, the value of Japanese property increased by more than 75 times. The US is 25 times the size of Japan and yet by 1990 Japanese property was worth 5 times as much as the entire American property market. The Imperial Palace in Tokyo alone was estimated to be worth as much as all of the property in California. Similarly stock prices increased 100 fold from 1955 to 1990.

The Bubble Bursts

At their peak, in December 1989, Japanese stocks were worth close to 45% of the world’s equity market capitalization. Japanese stocks sold at more than 60 times earnings, almost 5 times book value, and more than 200 times dividends. In contrast, U.S stocks sold at about 15 times earnings. Advocates for the Japanese property and stock markets argued that there were many reasons for the disparity including low Japanese interest rates, cultural differences, accounting rules and taxes. In 1989 the Bank of Japan (BOJ) began to restrict credit and increase interest rates. Over the next two decades, the Japanese stock market would lose 85% of its value and today still languishes 40% below its 1989 peak.

The BOJ cut rates through the 1990s, eventually cutting them close to zero in 1998 and has kept them near this level ever since. They were also the first modern central bank to conduct the now familiar quantitative easing (QE) when they began buying Japanese Government Bonds in 2001.


Many see Japan’s story being eventually repeated in the USA and particularly in Europe. While Japan’s story has a start and a middle, the end has yet to unfold.  Asset prices are in a 30 year slump in spite of the ever increasing efforts of the central bank to elevate them. The final outcome of the 30 year tussle between market forces and the Bank of Japan’s printing press will tell us a lot about our own future in Europe.

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