Nikkei, Boomer

Yes, stocks can go down and stay down, but in relation to what?

Japan's stock bubble gets rolled out time and time again as a cautionary tale against assuming stocks will rise in the long term. In reality, it's as much a story of currency.

You'll read something blood-curdling like this: "the Nikkei 225 [22,977.13 on 2 Nov 2020] is still 70% below its peak [38915.87 on 29 Dec 1989] after 30 years!"

🙄 [Eye Roll]

Often overlooked is that during that period, the US Dollar fell against the Japanese Yen from 143.8 to 104.73. So the Nikkei fall expressed in US Dollars is 270.63 to 219.39; a 24% drop - not great - but annual dividends of 1.3% make for positive long-term total returns.

US Dollars dominate international trade. Goods and services - cars, coal, corn - are priced in US Dollars, and so they're more stable in that currency than in others. Although there is inflation and you will pay more in US Dollars for the same stuff over time, it's common knowledge that the Japanese Yen has increasing buying power (i.e. there is deflation in Japan.) And one thing the Japanese Yen buys increasingly more of is US Dollars. To explain that, we need to go further back than 1989.

🏢

Let's look at values around another date: 22 September 1985, the signing of the Plaza Accord which forced yen appreciation. The Nikkei 225 was at 12666.89 and it was 231.9 Yen to the Dollar. The Nikkei 225 in US Dollar terms was 54.62 and so has delivered a US Dollar annualised return of 4.05%. Mediocre maybe, but not disastrous.

Cautionary tales are meant to be dramatic, and often omit nuance to achieve that effect.

While there's no question your US Dollars would have escaped the Japan bubble if converted into Japanese Yen, they wouldn't have done bad in Japanese stocks either.

Perhaps the warning to be cautious on stocks and instead hold cash should qualify that 'cash' means Yen. Otherwise, a better take-away would be to consider assets other than US Dollars.