Japan vs US stock returns over 30 years - Why So Different?

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PatW86
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Japan vs US stock returns over 30 years - Why So Different?

Post by PatW86 » Sun Sep 20, 2015 9:58 am

I did a quick calculation of what one dollar invested in the Nikkei 225 over 30 years would be. That dollar would be worth something like $1.60 today - obviously a terrible investment

The S&P 500 return over the same period has a CAGR of about 8.5% so that dollar would be worth something like $11.

In a nutshell can anyone explain why a first world country like Japan has produced such dismal stock returns over such a long period? I am aware of the insane real estate bubble of the early 1990s but even still why so bad?

It certainly makes one take pause and realize that this is not unthinkable here in the U.S. over the next 30 years.... :(
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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by in_reality » Sun Sep 20, 2015 10:15 am

Historically if you go back to the time of the Samurai when their civil wars ended and the Samurai stopped fighting and doing more productive things, it was said that just as they received a stipend from the Shogun for the good of Japan, so too they could have enterprises for the good of everyone (in their Han).

In modern day times, there are labor regulations not allowing companies to restructure by firing people and while nice for employees, this restricted what companies could do when they needed to downsize/ restructure.

Currently, I believe part time employment has increased dramatically as companies are more wary of ongoing obligations.

So my take is that this cautionary tale is less for the US, but perhaps more for international investing where different countries my take a different view of what Capitalism should be. I've seen commentary suggesting firms in China are keeping unproductive operations going for the sake of employees but I don't really know the extent of that.

Of course, a prolonged downturn could happen in the US but not for the same reasons as it was extended in Japan I think.

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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by SimpleGift » Sun Sep 20, 2015 10:26 am

PatW86 wrote:In a nutshell can anyone explain why a first world country like Japan has produced such dismal stock returns over such a long period?
Japan has had the most rapidly aging population in the world and a population and workforce that's also shrinking (chart below). This has affected GDP growth, fiscal sustainability and ultimately stock prices — plus creating substantial deflationary pressures. Many of these same factors will be affecting other advanced countries going forward, especially in Europe.
NOTE: Due to higher fertility and immigration rates, the U.S. is NOT expected to follow Japan and Europe's demographic fate.
Cordially, Todd

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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by kolea » Sun Sep 20, 2015 11:07 am

It is actually more complicated than just the inverted distribution in which there are a lot more people over 65. This is exacerbated by the fact that retirement age keeps going down. It has gotten as low as 55 in some countries (in Greece, for instance, which is a contributing factor to their problems). The fraction of the population that is producing shrinks relative to the fraction of people who are purely consuming. GDP (per person) goes down and the economy suffers.

But GDP is not the entire story with Japan. They had a huge real estate bubble that popped in 1990 and have been running huge deficits. Their monetary policy is such that the Yen has large swings in value. Apparently they are trying a version of QE that is having some success but I believe people are wondering if it can last. Of course everyone wonders to what extent QE is propping up the US market also.
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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by PatW86 » Sun Sep 20, 2015 12:08 pm

Interesting thank you for the responses. In regards to international investment then, I'm curious do people think Europe/Japan will solve its demography problems and produce good investment returns over the coming decades or not?

Take a county like Germany, which has a good business climate, the rule of law, strong institutions, and a long history with capitalism. If their overriding problem is demography then that is a pretty simple solution right? [OT comments removed by admin LadyGeek]

An emerging markets country has a lot more hurdles to leap over in order to produce good returns for investors even if the demographic outlook is favorable.
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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by SimpleGift » Sun Sep 20, 2015 12:22 pm

PatW86 wrote:Interesting thank you for the responses. In regards to international investment then, I'm curious do people think Europe/Japan will solve its demography problems and produce good investment returns over the coming decades or not?
One thing to keep in mind is that, with increasing globalization, companies worldwide are generating more and more of their revenues and profits beyond their home countries (table below). This trend will only increase in the decades ahead, as most large global companies focus on the rising consumer demand by the fast-growing middle class in emerging countries.

This trend toward foreign sales confounds any demographic analysis that just looks at an individual country, and then tries to project its economic growth and stock market returns. In other words, there's just as good a chance that Japanese or European firms (or local emerging market companies) will benefit most from the emerging economies' future growth — which is a strong reason to own shares of ALL the global companies, in my view, in an allocation of one's choice. We just can't know in advance which companies will be the future global winners.
Cordially, Todd

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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by lack_ey » Sun Sep 20, 2015 12:35 pm

For what it's worth, part of the difference is just valuation changes.

I don't at all consider Shiller PE (CAPE) the final say in terms of valuations, but for reference, in mid-late 1985 it was something like 41 in Japan, 10.5 in the US. Now it's around 25 for both. That's something like a 1.6% a year headwind for Japan and a 2.9% a year tailwind for the US, a big swing.

By the way, Italy has been muddling around for more than 30 years. Over 50 years since the peak in the early 60s and their real equity returns are about 0% cumulative. We can talk about their problems too in hindsight.

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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by alex_686 » Sun Sep 20, 2015 12:51 pm

Random comments

You chose an interesting time period.

You chose a time frame that included the peak of the Japanese bubble. The past 15 years Japan has been in a recession. We can debate the reason for this. Demographics is only one of the reasons. There are other structural issues out there.

IIRC the Nikkei is a price index, not a market cap index. Japanese companies have dramatically restructured over the time period, reducing cross holdings. This has put a downwards pressure on the stock. Plus you need to factor in reinvested dividends.

From a Japanese perspective, the stock market has not been doing that badly when compared to 10 year Japanese government bonds. If you invest domestically the choice is between a risk free asset or the stock market. The risk free asset return has been basically zero. This would suggest a low return on equity. Japanese investors have a strong home bias.

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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by Rx 4 investing » Sun Sep 20, 2015 1:00 pm

Studies suggest there is a non-linear relationship between high levels of public and private debt, and its depressive effect on GDP. From 1790 -1999, per capita GDP in the US grew roughly at 2% per annum. (after inflation).

The current public and private debt /GDP ratio of the US is north of 275%, a level associated with deleterious effects on GDP. (chart) Some studies suggests when levels are north of 275% , a nation forfeits about 1/4 of trend rate of growth.

--Japan's total debt/ GDP is around 650%, and is thus creating a tremendous drag on their GDP growth.

--In the last 15 years, the US' per capita GDP growth rate was roughly 1% per annum . The US has lost about 50% of long-trend GDP growth. There may be other factors such as import content factors, as we are a 70% consumer-driven economy. More on this following.

The near -term situation for the US is not encouraging. Consider the negative implications for US' GDP from the recent crash in oil prices. The US consumers about 19 M barrels of petroleum products, and we import 5 M barrel, which is an import content of about 27%. Early evidence suggests that US consumers are saving rather than spending the savings from the fall in gasoline prices.

Remember that GDP is calculated by adding domestic spending and subtracting the imports . If consumers were to decide to spend some of that gasoline savings on small ticket items like clothing and televisions that have an import content of 90%, that lowers US GDP.

One of the bright spots of the US economy in recent years was the oil and gas sector. Petroleum products were about 12% of cap-ex and R & D, and were probably making a contribution somewhere around 35% of the GDP growth (directly and indirectly). The weakness in global demand that has depressed oil prices will be handicapping the most dynamic sector of the US economy.

WHAT ARE THE INVESTING IMPLICATIONS ? IMO: The developing macro-economic situation in the US is de-flationary in nature, and hints at an above average allocation to HIGH QUALITY BONDS like treasuries. Stocks will be mixed bag in a slow growth, de-flationary environment. Publically traded companies are likely to experience pressure on their earnings power. As Peter Bernstein noted many years ago, in a de-flationary environment, the return on risk assets can go to zero (0%). Monthly data suggests S & P 500 earnings may have peaked in the 4-Q-14.

Good luck out there. For the risk-averse among us, it might be best to remain wary of Wall Street investment houses' sanguine outlook for risk-on investments like equities in the coming quarters. It is not a good idea to be over-invested in stocks in an expensive market that is declining. Personally, I think Yellen and the Fed were correct in their current assessment of the risks posed from weakness of the global economy.

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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by nedsaid » Sun Sep 20, 2015 5:08 pm

Let me take a stab at this.

First of all, Japan experienced bubbles in their stock market and in their real estate market. Their markets from what I understand had bubbles that well exceeded our early 2000 stock bubble and the 2007 real estate bubble. Their markets had further to fall. Very high savings rates in Japan were a factor in pushing up the prices of their markets.

Second, American capitalism is more ruthless. When profit growth is threatened, American companies will spin off lower growing parts of their businesses and lay off employees. The idea of lifetime employment with a single company is almost unknown here. Americans are also quicker to write off bad loans, take the loss and get them off the books. Japanese banks are still carrying a fair amount of non-performing debt. A pretty good argument can be made that Americans made better use of their capital than the Japanese.

Third, there is less central planning here. The Japanese model of cooperation between business, labor, and government as well as industrial policy was touted as a model to follow here before everything fell apart. Central planning just does not work that well for an economy when trying to set output and production goals. The communists in the Soviet Union did it with lots of success early on but eventually the Soviet economy produced too little of some things and too much of others. Much of what they produced was of low quality and what consumers didn't want. Good old supply and demand works pretty well to allocate resources.

The Japanese were really big on investment and that is a good thing. The problem is that you can't just keep expanding capacity if there isn't the demand. Consumers can only consume so much. And this was a big failure of central planning. Too many factories producing too many goods. The Chinese are about to find this out. The Japanese were big on planning for the long term and that is also a good thing. The problem is that the world can change faster than planners can plan. The world economy is pretty dynamic.

Forth, the Japanese face a big demographic problem. Their population and indeed their work force is shrinking. The Japanese if anything are pretty ingenious and my suspicion is that robotics will take up a lot of the slack. The Japanese also are not too favorable to immigration.

All that being said, Japan is a wealthy country and they do most things right. When you take into account the strength of the Japanese Yen during this time period, the domestic Japanese investor did not fare as badly as is perceived here. Another thing I like about Japan and Japanese products is the emphasis on quality. It says a lot that my family members mostly drive Japanese cars. There is much about Japan to admire and to learn from.
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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by kolea » Sun Sep 20, 2015 6:00 pm

PatW86 wrote: Take a county like Germany, which has a good business climate, the rule of law, strong institutions, and a long history with capitalism. If their overriding problem is demography then that is a pretty simple solution right? Take a county like Germany, which has a good business climate, the rule of law, strong institutions, and a long history with capitalism. If their overriding problem is demography then that is a pretty simple solution right? [OT comments removed by admin LadyGeek]
Now there is a topic that can be debated endlessly, but of course the mods would come down on us for straying too far from investing. So I will only say this: [OT comments removed by admin LadyGeek]
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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by kolea » Sun Sep 20, 2015 6:12 pm

Simplegift wrote:
One thing to keep in mind is that, with increasing globalization, companies worldwide are generating more and more of their revenues and profits beyond their home countries (table below). This trend will only increase in the decades ahead, as most large global companies focus on the rising consumer demand by the fast-growing middle class in emerging countries.
But you have to ask if that is a sustainable model. No country is going to tolerate their capital being drained away to the enrichment of the US. The world went through a similar thing in the 19th century with colonialism. The politics are different but the effect is the same.
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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by sawhorse » Sun Sep 20, 2015 6:31 pm

alex_686 wrote:You chose an interesting time period.

You chose a time frame that included the peak of the Japanese bubble. The past 15 years Japan has been in a recession. We can debate the reason for this. Demographics is only one of the reasons. There are other structural issues out there.

IIRC the Nikkei is a price index, not a market cap index. Japanese companies have dramatically restructured over the time period, reducing cross holdings. This has put a downwards pressure on the stock. Plus you need to factor in reinvested dividends.

From a Japanese perspective, the stock market has not been doing that badly when compared to 10 year Japanese government bonds. If you invest domestically the choice is between a risk free asset or the stock market. The risk free asset return has been basically zero. This would suggest a low return on equity. Japanese investors have a strong home bias.
If you use the TOPIX (market cap index) and reinvest dividends, 100000¥ invested at the beginning of 2000 would be worth 102562¥ at the beginning of 2015. Using the Nikko BPI government long term bond index, which is for government bonds between 7 and 15 years, 1000000¥ invested at the beginning of 2000 would be worth 155174¥ at the beginning of 2015. These calculations don't include expense ratios or taxes.

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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by SimpleGift » Sun Sep 20, 2015 6:34 pm

TwoByFour wrote:
Simplegift wrote: One thing to keep in mind is that, with increasing globalization, companies worldwide are generating more and more of their revenues and profits beyond their home countries (table below). This trend will only increase in the decades ahead, as most large global companies focus on the rising consumer demand by the fast-growing middle class in emerging countries.
But you have to ask if that is a sustainable model. No country is going to tolerate their capital being drained away to the enrichment of the US. The world went through a similar thing in the 19th century with colonialism. The politics are different but the effect is the same.
Globalization is not just benefiting U.S. companies. It's a two-way street — or should we say a multi-lane, multi-directional highway (chart below). Global, free-market capitalism is the opposite of colonialism, in my view — with companies from nearly any country increasingly being able to market their goods and services to consumers worldwide.
NOTE: This chart shows the revenue sources for the various MSCI regional stock indexes. For example, an investor with 100% allocation to the MSCI Europe Index would only be 50% exposed to Europe by revenue, and 18% exposed to North America, 5% to the Pacific region and 27% to emerging markets.
Cordially, Todd

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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by sawhorse » Sun Sep 20, 2015 7:01 pm

Simplegift wrote:
TwoByFour wrote:
Simplegift wrote: One thing to keep in mind is that, with increasing globalization, companies worldwide are generating more and more of their revenues and profits beyond their home countries (table below). This trend will only increase in the decades ahead, as most large global companies focus on the rising consumer demand by the fast-growing middle class in emerging countries.
But you have to ask if that is a sustainable model. No country is going to tolerate their capital being drained away to the enrichment of the US. The world went through a similar thing in the 19th century with colonialism. The politics are different but the effect is the same.
Globalization is not just benefiting U.S. companies. It's a two-way street — or should we say a multi-lane, multi-directional highway (chart below). Global, free-market capitalism is the opposite of colonialism, in my view — with companies from nearly any country increasingly being able to market their goods and services to consumers worldwide.
NOTE: This chart shows the revenue sources for the various MSCI regional stock indexes. For example, an investor with 100% allocation to the MSCI Europe Index would only be 50% exposed to Europe by revenue, and 18% exposed to North America, 5% to the Pacific region and 27% to emerging markets.
Very interesting! Do you know if such charts are available historically so we can see the shift?

I'm surprised at how much the emerging markets index is exposed to other emerging markets. I would have thought that they'd get more of their revenue from developed markets.

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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by dumbmoney » Sun Sep 20, 2015 7:04 pm

PatW86 wrote:I did a quick calculation of what one dollar invested in the Nikkei 225 over 30 years would be. That dollar would be worth something like $1.60 today - obviously a terrible investment

The S&P 500 return over the same period has a CAGR of about 8.5% so that dollar would be worth something like $11.
Your numbers look off to me. The S&P 500 returned about 11.4% over the last 30 years. The Nikkei 225 returned about 5%. Anyway, it doesn't change the conclusion - yes, it's a pretty big difference.
PatW86 wrote:I am aware of the insane real estate bubble of the early 1990s but even still why so bad?
Well, I think the stock bubble is the single largest factor.
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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by lack_ey » Sun Sep 20, 2015 7:59 pm

sawhorse wrote:[...]
I'm surprised at how much the emerging markets index is exposed to other emerging markets. I would have thought that they'd get more of their revenue from developed markets.
A lot of the companies are local banking, utilities, energy that serves the home market, cheaper goods, brands seen mostly only locally and in other cost-sensitive emerging markets, and so on.

On the other hand, just think, the MSCI emerging markets index includes South Korea and Taiwan, and look how much foreign revenue Samsung, Hyundai, Kia, Hynix, and TSMC (and all the Taiwanese IT/computer companies like Asus, Mediatek, etc.) get. Okay, that's only about 6-8% of the total market cap of the (entire emerging markets) index, but still.

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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by SimpleGift » Sun Sep 20, 2015 8:08 pm

sawhorse wrote:Very interesting! Do you know if such charts are available historically so we can see the shift?
That would be nice. However, the earliest global revenue data I've seen was in a November 2013 article in the The Economist. MSCI has only recently been publishing revenue data for their indexes, and on an irregular basis at that.

At time goes on, and the revenue sources of the major stock indexes begin to diverge more and more from companies' country-of-domicile, there will be increasing attention and data on this subject, I expect.
Cordially, Todd

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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by saurabh » Sun Sep 20, 2015 8:42 pm

PatW86 wrote: It certainly makes one take pause and realize that this is not unthinkable here in the U.S. over the next 30 years.... :(
It is not going to be that bad in the US even under a worst case scenario. The US system simply respects shareholder capital more than any other developed nation on earth. So it is the best place for a shareholder to be in the developed world.

I think Mr. Bogle's reasons for why the US is better than Europe for the stock market investor is wrong, but I think his conclusion is entirely correct. I have been investing since 1998 and in the 18 years there have been maybe 2 or 3 years that the EAFE in local currencies has outperformed the S&P 500, and with exception of one year, the differences were negligible. I am entirely comfortable with setting EAFE allocation to zero. I like emerging markets but my one issue there with the index is the excessive weighting of certain countries and most actively managed funds are too cautious to diverge very significantly and are also higher cost. I am pretty close to selling out of my Developed Markets index fund and allocating it all to emerging markets, will probably do that within the next year. Just waiting for China to go down more as it has such a heavy weight in the emerging markets index fund.

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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by sawhorse » Sun Sep 20, 2015 8:51 pm

nedsaid wrote:Let me take a stab at this.

First of all, Japan experienced bubbles in their stock market and in their real estate market. Their markets from what I understand had bubbles that well exceeded our early 2000 stock bubble and the 2007 real estate bubble. Their markets had further to fall. Very high savings rates in Japan were a factor in pushing up the prices of their markets.
By far the biggest reason is the bubble that burst in 1990. Valuations then were comparable to valuations of the NASDAQ in early 2000. With the US crash, the extreme valuations were concentrated in some sectors whereas the Japanese bubble was widespread. Take the valuations of small internet companies in early 2000 and apply that to the entire market. That was the situation in Japan.

The Nikkei was 39,000 in late 1989. Today it is 18,000 after a few strong years. The NASDAQ hasn't recovered its high from 2000. And the NASDAQ has diversified and expanded and has benefited from strong growth in other industries that pulled up the whole market. That wasn't possible in Japan because outrageous valuations were widely distributed.

Japan suffered a big setback, like everyone else, in 2008. In this case, it was mostly an unlucky bystander sucked into the mess. The debt problems, subprime mortgages, etc were practically nonexistent in Japan at the time. But global markets are so interconnected now that no country can escape a worldwide collapse like that.
nedsaid wrote: Second, American capitalism is more ruthless. When profit growth is threatened, American companies will spin off lower growing parts of their businesses and lay off employees. The idea of lifetime employment with a single company is almost unknown here. Americans are also quicker to write off bad loans, take the loss and get them off the books. Japanese banks are still carrying a fair amount of non-performing debt. A pretty good argument can be made that Americans made better use of their capital than the Japanese.
Good points. There has traditionally been a lot more loyalty between Japanese employers and employees. The decision to lay off employees is taken more seriously, and there is more personal guilt for the decision makers. The financial and psychological impact on laid off employees is considered. In the US, such concerns are often casually dismissed and scoffed at ("don't let emotions affect business decisions").

This has started falling apart since the crash, and now you see a lot of part time work, but there is still a cultural belief that loyalty is something to strive for.

Your second point about debt is interesting. In Japan there is more shame in not paying off a debt. Bankruptcy is difficult and stigmatized.

In a sense, you can say that a sense of personal responsibility is more deeply ingrained in Japanese economic culture.
TwoByFour wrote:It is actually more complicated than just the inverted distribution in which there are a lot more people over 65. This is exacerbated by the fact that retirement age keeps going down. It has gotten as low as 55 in some countries (in Greece, for instance, which is a contributing factor to their problems). The fraction of the population that is producing shrinks relative to the fraction of people who are purely consuming. GDP (per person) goes down and the economy suffers.
Retirement age is a tricky thing. When people retire at younger ages, like you say, they are purely consuming and not producing. On the other hand, a large population of older workers means higher wages (think about all the people forced into early retirement in the United States) and high youth unemployment. That's why some countries, including Japan have mandatory retirement ages.

In Japan, retirement age is especially tricky due to the low birth rate and the life expectancy. There are so many older people to support. The average life expectancy is 80 for men and 87 for women :shock:
saurabh wrote:The US system simply respects shareholder capital more than any other developed nation on earth. So it is the best place for a shareholder to be in the developed world.
Could you explain more what you mean?

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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by randomguy » Sun Sep 20, 2015 9:08 pm

if you would have compared lets say 19609-1989, you would be asking the same question:

Niki 1960 1,356.71 -> 38915
S&p 500 58->348

Why did Japan go up like 30x while the US went up a mere 6x. Was it because of the USes younger population and respect for shareholders rights?:) People have been debating for a long, long time what is wrong with japan. You can blame lack of destructive capitalism, aging population, and so on.

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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by saurabh » Sun Sep 20, 2015 9:13 pm

sawhorse wrote:
saurabh wrote:The US system simply respects shareholder capital more than any other developed nation on earth. So it is the best place for a shareholder to be in the developed world.
Could you explain more what you mean?
It is pretty simple. In the US it is not acceptable for a publicly traded company to be stuck for decades with low ROEs, low ROICs and low stock returns. Either the board fires the CEO, a new CEO comes in and takes action, or otherwise activists come in or PE firms take it private and restructure. Either way the company tries to do something to change its fortunes. In many countries (especially Japan) it seems the CEO's job is pretty secure regardless of the suffering of holders of common stock. Also in the US terrible economic performance and stock market performance leads to political pressure on the federal government during election cycles. In many other countries it seems that non-economic concerns are paramount.

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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by sambb » Sun Sep 20, 2015 9:20 pm

the lesson to learn is that "stay the course" does not always work. There will be detractors here, but it is probably true that there are times when "stay the course" is very bad advice. Unfortunate for investors in japan who did stay the course. if the market here in the US goes on a 5 year decline or longer, i will regret staying the course.

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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by Texanbybirth » Sun Sep 20, 2015 9:28 pm

Fascinating topic. I was 5 at the time of the Japanese market collapse mentioned in the thread, so this history less has been worth reading. :beer

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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by gkaplan » Sun Sep 20, 2015 9:30 pm

sambb wrote:the lesson to learn is that "stay the course" does not always work. There will be detractors here, but it is probably true that there are times when "stay the course" is very bad advice. Unfortunate for investors in japan who did stay the course. if the market here in the US goes on a 5 year decline or longer, i will regret staying the course.

I think you misunderstand what "stay the course" means. Just like some misunderstand what "buy and hold" means. I'll give you a hint: They're interrelated.
Gordon

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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by sawhorse » Sun Sep 20, 2015 9:38 pm

Two more events that haven't been mentioned.

Japan's recovery has been most hampered by other East Asian countries. The 1997 Asian Financial Crisis heavily affected Japan. Japanese banks were heavily invested in those countries, and the plurality of Japanese exports were to other East Asian countries. When countries in that region devalued their currencies, it was impossible for Japanese exports, already expensive (for good reason in my experience), to maintain sales.

The second and bigger event is the economic rise of other countries in East Asia, China and South Korea foremost but also smaller countries. China in particular has advantages over Japan. There's a huge population of people so desperate that they are willing to work all day in dangerous conditions for pennies.

Another major advantage, from a purely business perspective, is that the countries that have risen in Japan's fall are countries where business ethics are less common than giant pandas. Corruption in government and business, to a degree unimaginable in the US, is the norm in those countries. Why do people resort to corruption? Because it works. :x

Finally, and I'm wondering if there has been scholarly work on this, these countries for historical reasons want nothing more than to see Japan suffer. Japan has made itself a lot of enemies in the region. Revenge is a powerful motivator.
saurabh wrote:
sawhorse wrote:
saurabh wrote:The US system simply respects shareholder capital more than any other developed nation on earth. So it is the best place for a shareholder to be in the developed world.
Could you explain more what you mean?
It is pretty simple. In the US it is not acceptable for a publicly traded company to be stuck for decades with low ROEs, low ROICs and low stock returns. Either the board fires the CEO, a new CEO comes in and takes action, or otherwise activists come in or PE firms take it private and restructure. Either way the company tries to do something to change its fortunes. In many countries (especially Japan) it seems the CEO's job is pretty secure regardless of the suffering of holders of common stock. Also in the US terrible economic performance and stock market performance leads to political pressure on the federal government during election cycles. In many other countries it seems that non-economic concerns are paramount.
This is compatible with nedsaid's quote about American capitalism being more ruthless. But I don't exactly see that US companies "respect shareholder capital" more with regard to CEOs. US companies spend far more of that shareholder capital on executive pay. The highest paid CEO in Japan is the Nissan CEO who earned a literally record-breaking total compensation (including bonuses, etc) of $12 million. The Nintendo CEO earned less than $3 million. Only 72 executives of publicly traded companies in all of Japan made more than 100 million yen (about $840,000) in total compensation last year. American boards might get rid of CEOs more readily, but they do it with severance packages comparable or even greater than the combined compensation of all 225 CEOs on the Nikkei.
Last edited by sawhorse on Sun Sep 20, 2015 10:02 pm, edited 1 time in total.

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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by protagonist » Sun Sep 20, 2015 9:47 pm

sambb wrote:the lesson to learn is that "stay the course" does not always work. There will be detractors here, but it is probably true that there are times when "stay the course" is very bad advice. Unfortunate for investors in japan who did stay the course. if the market here in the US goes on a 5 year decline or longer, i will regret staying the course.
This is absolutely correct. Then again, if you cash out today and it experiences a 5 year or longer growth spurt, you will regret not staying the course. Unfortunately, though many seem to have answers, we are all bozos on this bus.

I "stay the course" predominantly because, when a better course of action is not evident to me, I see no reason to rock the boat. ( I probably would have done poorly if confronted with the Monty Hall problem I suppose).

I can offer a simple response to the OP's question. With a retrospect-o-scope it is always easy to find justifications for why the future will conform to our beliefs, but in the case of finance our justifications are based predominantly on faith, not on science. I don't recall many people raising warning flags about a 30 year decline in Japan in the 1980s. But now it is easy to come up with reasons and wonder why so many people were so clueless back then. And why we are different.

We are living in an era of huge challenges. Will the US in the year 2100 be more like The Jetsons or more like Mad Max? Beats me. But the one thing I am fairly certain about is it will not look a lot like today.
Last edited by protagonist on Sun Sep 20, 2015 9:55 pm, edited 1 time in total.

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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by sambb » Sun Sep 20, 2015 9:54 pm

protagonist wrote:
sambb wrote:the lesson to learn is that "stay the course" does not always work. There will be detractors here, but it is probably true that there are times when "stay the course" is very bad advice. Unfortunate for investors in japan who did stay the course. if the market here in the US goes on a 5 year decline or longer, i will regret staying the course.
This is absolutely correct. Then again, if you cash out today and it experiences a 5 year or longer growth spurt, you will regret not staying the course. Unfortunately, though many seem to have answers, we are all bozos on this bus. I "stay the course" predominantly because, when a better course of action is not evident to me, I see no reason to rock the boat. ( I probably would have done poorly if confronted with the Monty Hall problem I suppose).

I can offer a simple response to the OP's question. With a retrospect-o-scope it is always easy to find justifications for why the future will conform to our beliefs, but in the case of finance our justifications are based predominantly on faith, not on science. I don't recall many people raising warning flags about a 30 year decline in Japan in the 1980s. But now it is easy to come up with reasons and wonder why so many people were so clueless back then.

We are living in an era of huge challenges. Will the year 2100 be more like The Jetsons or more like Mad Max? Beats me. But the one thing I am fairly certain about is it will not look a lot like today.

great discussion, yes it is possible for the US to have a 20-30 year stagnation or decline. Who knows - past performance is no guarantee. If we go on a 20 year decline, i wonder how many people here would still stick with it and say "stay the course" over 10-20 years.

Stay the course is a great philosophy when the market generally goes up over decades. It might be Terrible in a prolonged decline, and esp if you have to retire during it.

I dont recall broad discussions of a 20-30 year decline in japan except in retrospect.

My goal is to make money and retire. So, I would always prefer to sell before a long decline, and buy back in later. Not sure why I would want to watch my money dwindle as the market goes down. I will hold here, but i am not naive in thinking it is a good philosphy if in retrospect the market goes down to 12000 or 10000

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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by sawhorse » Sun Sep 20, 2015 9:59 pm

sambb wrote:great discussion, yes it is possible for the US to have a 20-30 year stagnation or decline. Who knows - past performance is no guarantee. If we go on a 20 year decline, i wonder how many people here would still stick with it and say "stay the course" over 10-20 years.

Stay the course is a great philosophy when the market generally goes up over decades. It might be Terrible in a prolonged decline, and esp if you have to retire during it.
I keep meaning to do my next writeup in my series on Japan. It'll be about how glide path allocations have fared and the effect of international diversification. In the one after that, I'll compare staying the course with getting off the course.

The difficulty with that decision is, what course do you switch to and when?

For retirees, staying the course is almost always a good idea if you are on an appropriate course. For retirees, that means a conservative allocation. Staying the course is risky to the extent that your portfolio is risky.

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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by sambb » Sun Sep 20, 2015 10:07 pm

sawhorse wrote:
sambb wrote:great discussion, yes it is possible for the US to have a 20-30 year stagnation or decline. Who knows - past performance is no guarantee. If we go on a 20 year decline, i wonder how many people here would still stick with it and say "stay the course" over 10-20 years.

Stay the course is a great philosophy when the market generally goes up over decades. It might be Terrible in a prolonged decline, and esp if you have to retire during it.
I keep meaning to do my next writeup in my series on Japan. It'll be about how glide path allocations have fared and the effect of international diversification. In the one after that, I'll compare staying the course with getting off the course.

The difficulty with that decision is, what course do you switch to and when?

For retirees, staying the course is almost always a good idea if you are on an appropriate course. For retirees, that means a conservative allocation. Staying the course is risky to the extent that your portfolio is risky.

I philosophically think differently, but i am not in any way saying everyone should. For me, Staying the course is the wrong decision if the market is going down, no matter what the risk is. My goal is to retire with X dollars. The closer I get to X, the better. if the market is going down, i get further away from X no matter what my risk tolerance is. The risk tolerance is independent in my thinking. Your mileage may vary.

The fact is, i do "stay the course" - but in no way do i believe that being "in" the market at any risk tolerance, is better than being out during a decline. For my equity portion, I would ideally always prefer to be out of the market if it is declining -and enthusiastically "in" when it is going up. My risk tolerance is independent of this thought.

My risk is based on past performance of market declines and advances, but I am not going to pretend that staying the course in a market decline is somehow a good for me, if my ultimate desire is to hit "X" dollars. I never want to be in the market and watch it go from 18000 to 12000. But i do so, because I am hopeful of overall market advances and NOT of a japan-like decline.

If a Japan-like decline happens, regardless of my risk, then staying the course would have been a terrible idea for me to reach "X" dollars.

Your mileage and thought process may vary, so i don't pretend to think that this is the way others should think. But to me, my goal is "X", and I want to get there. Staying the course can help or hurt me in reaching the goal. It doesn't exclusively "help".
Last edited by sambb on Sun Sep 20, 2015 10:10 pm, edited 1 time in total.

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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by sawhorse » Sun Sep 20, 2015 10:09 pm

sambb wrote:The fact is, i do "stay the course" - but in no way do i believe that being "in" the market at any risk tolerance, is better than being out during a decline. I would always prefer to be out of the market if it is declining -and enthusiastically "in" when it is going up. My risk tolerance is independent of this thought.
...
If a Japan-like decline happens, regardless of my risk, then staying the course would have been a terrible idea for me to reach "X" dollars.

Your mileage and thought process may vary, so i don't pretend to think that this is the way others should think. But to me, my goal is "X", and I want to get there. Staying the course can help or hurt me in reaching the goal. It doesn't exclusively "help".
Unfortunately, you only know in hindsight if it was right to stay the course. You don't know if the declining market will continue to decline, or whether it'll start recovering tomorrow. And you don't know if the rising market will crash tomorrow. Investing is so frustrating :annoyed

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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by SimpleGift » Sun Sep 20, 2015 10:47 pm

sambb wrote:If a Japan-like decline happens, regardless of my risk, then staying the course would have been a terrible idea for me to reach "X" dollars.
The terrible idea would have been to invest only in a single country to begin with. Those Japanese investors who diversified their holdings with foreign stocks and bonds had very different outcomes from 1990-2014 than Japan-only investors (chart below). Moral of the story: International diversification reduces single country risk.

Boglehead poster bpp (from Japan) has done a very nice historical analysis in this thread:

Image
Source: Boglehead bpp
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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by Phineas J. Whoopee » Sun Sep 20, 2015 10:52 pm

sambb wrote:...
great discussion, yes it is possible for the US to have a 20-30 year stagnation or decline. Who knows - past performance is no guarantee. If we go on a 20 year decline, i wonder how many people here would still stick with it and say "stay the course" over 10-20 years.
...
We've had them, just not recently enough that people are thinking about them.

Check out the Long Depression, triggered by the Crime of '73, or maybe the Panic of 1873, officially ending in the US in 1879 but without much real recovery, carrying through to the Panic of 1893, with recovery beginning in 1897. 1897 - 1873 = 24 years of little to no net growth.

After that, well, after about 1901, we were more or less OK.

Until the Panic of 1907.

With so much experience under our collective belt we introduced structural changes to prevent such things. Maybe, with them in place, this time it really is impossible.

PJW

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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by sawhorse » Sun Sep 20, 2015 11:06 pm

Simplegift wrote:
sambb wrote:If a Japan-like decline happens, regardless of my risk, then staying the course would have been a terrible idea for me to reach "X" dollars.
The terrible idea would have been to invest only in a single country to begin with. Those Japanese investors who diversified their holdings with foreign stocks and bonds had very different outcomes from 1990-2014 than Japan-only investors (chart below). Moral of the story: International diversification reduces single country risk.

Boglehead poster bpp (from Japan) has done a very nice historical analysis in this thread:
Source: Boglehead bpp
International diversification definitely would have reduced the risk for a Japanese investor. The question is whether it would have done better than panicking and pulling out. The answer is unclear as I'll show in the "episode" after the next episode on Japan. Which means I should stop procrastinating on it :|

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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by Nathan Drake » Sun Sep 20, 2015 11:56 pm

Valuations are very important. While some metrics put US equities as overvalued, they are a far cry from Japanese equities at their peak.

International stocks in general have very attractive valuations right now, out of all equities.

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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by Maynard F. Speer » Mon Sep 21, 2015 6:22 am

I think we overestimate the aging demographics issue ... I think it's 20th century thinking, and in fact we may find it's a complete nonissue

Japan's population may be aging faster than the rest of the world, but they're leading the world in automation .. An automotive factory in the 1960s may have employed 200 young people .. In 2020 you might just need a single person to come in at 9 o'clock and turn the power on (that is if they don't work around the clock)

Why has Japan returned so much less over 30 years?

Valuations ... As others have suggested, Japan was already in a bubble 30 years ago - CAPE ratio in the mid-30s

Image

Japan's simply been too expensive, and I think financial initiatives have maintained abnormal valuations, and created a misleading average

Image
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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by LadyGeek » Mon Sep 21, 2015 3:37 pm

I removed some earlier political comments and a reply. As a reminder, see: Unacceptable Topics
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Please stay focused on factual aspects. Socio-economic status discussions will also derail the thread and are off-topic.
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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by PatW86 » Mon Sep 21, 2015 9:19 pm

protagonist wrote:
sambb wrote:the lesson to learn is that "stay the course" does not always work. There will be detractors here, but it is probably true that there are times when "stay the course" is very bad advice. Unfortunate for investors in japan who did stay the course. if the market here in the US goes on a 5 year decline or longer, i will regret staying the course.
This is absolutely correct. Then again, if you cash out today and it experiences a 5 year or longer growth spurt, you will regret not staying the course. Unfortunately, though many seem to have answers, we are all bozos on this bus. I "stay the course" predominantly because, when a better course of action is not evident to me, I see no reason to rock the boat. ( I probably would have done poorly if confronted with the Monty Hall problem I suppose).

I can offer a simple response to the OP's question. With a retrospect-o-scope it is always easy to find justifications for why the future will conform to our beliefs, but in the case of finance our justifications are based predominantly on faith, not on science. I don't recall many people raising warning flags about a 30 year decline in Japan in the 1980s. But now it is easy to come up with reasons and wonder why so many people were so clueless back then.

We are living in an era of huge challenges. Will the year 2100 be more like The Jetsons or more like Mad Max? Beats me. But the one thing I am fairly certain about is it will not look a lot like today.
Yes this goes to the heart of why I started this thread. I am sure if one took a time machine back to 1985 and told Japanese stock market investors they were about to have decades of poor returns (dubbed the Lost Decades by economists) they would be pretty flabbergasted.

It also is the reason why I always scratch my head when I see even someone like John Bogle advise people to just buy U.S. stocks. International diversification looks even more key in light of historical cases like this.
"October:This is one of the particularly dangerous months to invest in stocks. Other dangerous months are July, January, September, April, November, May, March, June, December..."- Mark Twain

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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by protagonist » Mon Sep 21, 2015 10:38 pm

PatW86 wrote:
protagonist wrote:
sambb wrote:the lesson to learn is that "stay the course" does not always work. There will be detractors here, but it is probably true that there are times when "stay the course" is very bad advice. Unfortunate for investors in japan who did stay the course. if the market here in the US goes on a 5 year decline or longer, i will regret staying the course.
This is absolutely correct. Then again, if you cash out today and it experiences a 5 year or longer growth spurt, you will regret not staying the course. Unfortunately, though many seem to have answers, we are all bozos on this bus. I "stay the course" predominantly because, when a better course of action is not evident to me, I see no reason to rock the boat. ( I probably would have done poorly if confronted with the Monty Hall problem I suppose).

I can offer a simple response to the OP's question. With a retrospect-o-scope it is always easy to find justifications for why the future will conform to our beliefs, but in the case of finance our justifications are based predominantly on faith, not on science. I don't recall many people raising warning flags about a 30 year decline in Japan in the 1980s. But now it is easy to come up with reasons and wonder why so many people were so clueless back then.

We are living in an era of huge challenges. Will the year 2100 be more like The Jetsons or more like Mad Max? Beats me. But the one thing I am fairly certain about is it will not look a lot like today.
Yes this goes to the heart of why I started this thread. I am sure if one took a time machine back to 1985 and told Japanese stock market investors they were about to have decades of poor returns (dubbed the Lost Decades by economists) they would be pretty flabbergasted.

It also is the reason why I always scratch my head when I see even someone like John Bogle advise people to just buy U.S. stocks. International diversification looks even more key in light of historical cases like this.
The world has never been more connected. Look at what happened in 2008....though the trigger was the collapse of the US banks (and housing bubble), the international markets suffered, on the whole, more than the US market. Though I am diversified internationally, I have little faith that will protect me if there is another US market collapse.

When it comes to forecasting the medium-to-long-term future of complex systems, John Bogle, for all his brilliance, like the rest of us, is just another bozo on the bus. Anybody's guess is as good as anybody else's. http://www.newyorker.com/magazine/2005/ ... -an-expert

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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by obgyn65 » Tue Sep 22, 2015 4:53 am

I have not read the whole threat but I believe a Japan-like stock long term slow crash, is overdue. This is why I remain invested in CDs and munis mainly.
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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by john94549 » Tue Sep 22, 2015 5:13 am

There was an interesting article in the NYT a few weeks back about the "hollowing out" of Tokyo's exurbs. The article focused on Yokosuka, once a vibrant port town (and home to a US Navy base), and now a shell of its former self. The not-so-subtle point of the article was the danger of an aging (and shrinking) population. Despite recent hiccups, for the long-term, I still believe in emerging markets, i.e., countries with more-than-ample birthrates, an emerging middle class, and growth. Japan fits into none of these categories.

I personally witnessed the beginning of the slide back in 1990, when the Japanese developer of our Maui condo project began dumping his units. Then, a few years later, he began to sell the "fee" to the land to current "leasehold" owners*, at basically a fire sale.

*Boy howdy, calculating the present discounted value of the "fee" was virtually impossible. I think the developer just set a price and waited to see what happened. What happened was that virtually everybody accepted his offer.

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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by HomerJ » Tue Sep 22, 2015 8:16 am

sambb wrote:The fact is, i do "stay the course" - but in no way do i believe that being "in" the market at any risk tolerance, is better than being out during a decline. For my equity portion, I would ideally always prefer to be out of the market if it is declining -and enthusiastically "in" when it is going up. My risk tolerance is independent of this thought.
Well, of course, we all would. Why do you think you're any different from us?

Too bad it's impossible to know if the market is going to go down or up tomorrow. So I'm not sure what your point is.

Getting out at the wrong time may hurt your chances of hitting "X" dollars just as much as staying in might...

So far, the general trend of the U.S. stock market over the long-term is upwards... That's why most of us feel it's the best bet for long-term stay-the-course investing...

Note, however, that very few of us are 100% stocks, even with that belief... I have 50% of my money in bonds to help me emotionally during the crashes, but also just in case stocks DON'T go upwards over the next 30 years.

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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by randomguy » Tue Sep 22, 2015 9:37 am

john94549 wrote:There was an interesting article in the NYT a few weeks back about the "hollowing out" of Tokyo's exurbs. The article focused on Yokosuka, once a vibrant port town (and home to a US Navy base), and now a shell of its former self. The not-so-subtle point of the article was the danger of an aging (and shrinking) population. Despite recent hiccups, for the long-term, I still believe in emerging markets, i.e., countries with more-than-ample birthrates, an emerging middle class, and growth. Japan fits into none of these categories.
I think you always needs a lot of context for those stories. How many US towns are shells of themselves (see Detriot or Buffalo). Are you looking at a trend or cherry picking?

Here is something else to think about: this is all public knowledge. Shouldn't it be baked into the stock prices? Why haven't investors pushed down japanese stocks to the point where they start returning the same as other markets? You can make arguements for government interference, unexpected events, and so on. It is always easy to come up with excuses as to why you should have seen something coming. Sometimes they are even true.

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Re: Japan vs US stock returns over 30 years - Why So Different?

Post by protagonist » Tue Sep 22, 2015 7:15 pm

randomguy wrote: Why haven't investors pushed down japanese stocks to the point where they start returning the same as other markets?
This is a very good question I hadn't thought about. After 30 years, could this be a good argument against efficient markets? In an efficient world, one would imagine that the Japanese market would have stabilized long before now.

I'm asking a question here, not proselytizing.

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