HAMISH MCRAE: The sun is finally rising over Nikkei and there will eventually be a similar reappraisal here

It’s been a long wait. Last Thursday, Japanese stocks finally reached their previous peak, which was reached more than 34 years ago.

The Nikkei 225 stock index closed at 39,098.68, down from 38,915.87 on December 29, 1989. This is probably the longest trough for stock prices in any major market on record.

The Dow Jones did not recover from its peak in September 1929 until November 1954, so 25 years. The FTSE 100 index has performed depressingly poorly, but did manage to return to its late 1999 peak of 6,930 in February 2015.

So what should we learn from Japan’s experience, especially in light of the current AI-inspired market growth of US tech companies?

The most basic point is that there is a fine line between “animal spirits” and “irrational exuberance.”

The first is the human condition famously described by John Maynard Keynes, where instinct and emotion come to dominate economic behavior.

The second is the title of a great book by the American economist Robert J. Shiller – published, as it turned out, at the peak of the US market in March 2000 – in which investors become excessively optimistic and think that stocks will continue to rise far above any rational level. justification.

Animal spirits can be positive because they help stimulate economic growth, while irrational exuberance always ends in tears.

What happened in Japan in the late 1980s defied all reason. The long economic boom had led to an extraordinary asset bubble.

At one point, the land of the Imperial Palace in Tokyo was valued at more than all of California.

Japanese companies have seized US trophy assets. Sony has acquired Columbia Pictures. Mitsubishi bought control of Rockefeller Plaza. Japanese investors also helped support U.S. stocks after the Black Monday stock crash in October 1987.

Coincidentally, a few days later I was in Tokyo at the offices of Yasuda Fire and Marine, the insurance company that had recently, somewhat controversially, purchased the most expensive work of art in the world: Sunflowers by Vincent van Gogh.

While we were watching it, the lead investment manager was suddenly called away. When he came back, he was beaming. He explained that the Ministry of Finance was on the line. They and other institutional investors had been ‘directed’ by the Treasury Department to put money into US stocks. “Japan,” he said, “will save America.”

As it turned out, US stocks recovered and the boom in Japan continued for another two years. However, in the early 1990s there was a global recession, which depressed asset prices everywhere.

The Ministry of Finance tried to slow any decline in Japan by pushing institutional investors to buy shares. Ultimately, that failed and the Nikkei bottomed out in 2009. Not only did the Japanese market fall the furthest, the decline lasted longer than anywhere else.

Looking back, the euphoria of the late 1980s seems absurd. Yet there were solid reasons behind this at the time. Japan was the fastest growing developed economy in the world, and its giant companies, Toyota, Sony and so on, dominated their markets.

However, in addition to its work ethic and technical excellence, the country was also helped by its demographics. In the 1960s and 1970s it had a young population: many people of working age and relatively few retirees. Now it’s the other way around.

Given the headwinds, the economy has actually not done that badly over the past thirty years. It has given the population a safe and healthy lifestyle, and they are among the longest living in the world. But it took a while for the giant companies’ strengths to be recognized and their stocks’ recovery to be fueled.

Does the current state of US markets resemble that of Japan in the 1980s? To a certain extent this is of course the case. They are certainly driven by animal spirits.

But there isn’t the same over-confidence. Market values ​​may be frothy, but not yet irrational. As far as Britain is concerned, I think we are in much the same situation as Japan was ten or fifteen years ago, when it was fashionable to talk the country down. That will change. I hope we won’t see irrational exuberance, but we could use a little less irrational depression.

But the immediate practical lesson from Japan is that moods can change quickly. The S&P 500 has done well and is up 27 percent from a year ago. But the Nikkei is up 42 percent. Ultimately, a similar revaluation will take place here. Just don’t ask me when.