Lessons From Japan’s ‘Lost Decades’ A record-long U.S. bull market hasn’t stopped investors from asking: Is Japanification coming this way, too?
dg> As I have said repeatedly the rest of the world could learn a lot from following the Japanese experience and their mistakes in handling it. But doesn't seem the rest of the world has learned from it
By Akane Otani WSJ
Jan. 1, 2020
The S&P 500 has soared 800% over the past 30 years, overcoming bear markets and a financial crisis. It almost seems as if stocks can’t go down, at least not for long.
On Dec. 29, 1989, the Nikkei Stock Average closed at a record 38915.87. Then it fell. And it never came back. Thirty years later, the Japanese market languishes 40% below its all-time high.
And Japan isn’t an easily dismissed outlier; it is a free-trading, technologically savvy developed market, in many ways not that dissimilar to the U.S.
Could what happened there happen here?
Like Japan, the U.S. has an aging population and a concentration of industry among a small number of giant businesses. In 2019, U.S. interest rates fell sharply, sparking serious discussion in markets, perhaps for the first time, of whether long-term rates could fall to zero or even turn negative. That already has happened in Japan and in much of Europe.
But the U.S. economy has undoubtedly cooled. Treasury yields, which came close to hitting record lows in 2019, are trading well below historical averages. Corporate earnings are likely to end 2019 nearly even with the prior year after several quarters of tax-cut-fueled growth. Productivity has withered, growing an average of 1.3% annually between 2007 and 2018 after increasing by an average rate of 2.7% between 2000 and 2007.
“It’s hard to come up with a scenario that gets us to where trend line growth is 3%,” said Dave Donabedian, chief investment officer of CIBC Private Wealth Management. Given U.S. markets look expensive relative to their peers, Mr. Donabedian expects stocks and bonds to deliver below-average returns over the next five to 10 years, and unloved areas such as emerging markets to potentially become more attractive over that time.
A future in which growth is scarcer also will throw into question strategies that have rewarded investors over the past decade, such as buying and holding passive, index-tracking funds in the U.S. or following the age-old wisdom of allocating 60% of one’s portfolio to stocks and 40% to bonds.
Japan already is feeling the pinch: The national pension fund hasn’t grown rapidly enough to keep up with a rapid rise in the elderly population. As a result, the country’s Financial Services Agency released a report in June warning that a typical couple would have to save at least $185,000—in addition to whatever they contributed to their pension over their lifetime—to sustain themselves after retiring. That has troubling implications for a country where, according to the Ministry of Health, Labor and Welfare, more than half of retirees live on pension payouts alone.
In the U.S., a similar problem is developing for state and local governments trying to deliver on promised benefits for retired workers. Public pension funds often can’t deliver returns at the pace that they need to fund future payouts for retirees, and many managers of such funds have had to lower their predictions of what they will be able to earn in future years. That is forcing governments to turn to unpalatable measures to stave off a shortfall in funding, such as venturing into riskier investments including commodities, private equity or real estate. Some analysts worry those could backfire in a downturn.
“This type of low-return environment has significant challenges for everyone who provides pensions, asset managers and also millennials who will be saving for their future,” said Allianz Global Investors’ Mr. Dwane.
2. Policy is key.
Another lesson drawn from Japan and increasingly Europe is that negative interest rates aren’t easy to quit. And they aren’t a panacea, either.
Over the past decade, the Bank of Japan, European Central Bank and Swiss National Bank, among other central banks, have cut their benchmark interest rates to below zero to try to fend off the threat of a deflationary spiral. The experiment hasn’t worked. In fact, central banks that introduced negative interest rates expecting them to be a short-term remedy have been unable to transition back.
That has diminished the attractiveness of yield-bearing assets in those countries and distorted asset prices, investors say. Bond yields in countries including Germany, France and Austria have fallen to record lows. Bank profits have taken a hit, hurt by falling net-interest margins, or the gap between what they pay for funding and what they make from loans.
“Rather than creating or accelerating economic activity, negative interest rates basically just lead to the zombification of the economy over time,” said Hans Olsen, chief investment officer of Fiduciary Trust.
Negative rates don’t look as if they will be coming to the U.S. soon. Federal Reserve Chairman Jerome Powell, testifying before Congress in November, said “the very, very low and even negative rates that we see around the world would not be appropriate for our economy.”
Even so, the problems ailing Europe and Japan are a cautionary tale that show the U.S. can’t necessarily rely on monetary policy alone to support its economy—especially with interest rates already at relatively low levels.
“The toolbox is less full today than it was in 2007,” said Neuberger Berman’s Mr. Amato. “To spur growth above what has come to be described as trend line growth, you’re going to need more help from the fiscal side of the ledger.”
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