To The Moon

On Friday morning July 23, 1982, news broke around the world that a consortium of Japanese companies was acquiring Rouge Steel… which until that point had been a wholly-owned subsidiary of the Ford Motor Corporation.

It was unthinkable: the Japanese were buying up an American steel company??!?

But it was just one of the first of many, many more acquisitions to come. Within a few years, Japanese companies and investors had bought up large chunks of prime US real estate, major companies, and just about any US asset they could get their hands on.

Sony bought the iconic Columbia Pictures (which had recently released cinematic gems like Ghostbusters and The Karate Kid). Japan’s Bridgestone Corp. snapped up the legendary Firestone Tire & Rubber Co. Mitsubishi bought 51% of the world famous Rockefeller Center in New York City.

Japanese automakers and technology manufacturers were beating the pants off of their US counterparts. And Japanese cultural phenomena from Nintendo to Transformers swept America’s youth.

Even popular movies from the late 1980s like Die Hard and Back to the Future 2 showed how the Japanese were taking over America.

All of this resulted in major public frenzy.

Corporate executives rushed to learn Japanese, and newspaper columnists railed against this ‘economic Pearl Harbor’. I was just a kid at the time and had no idea what was happening, but I do remember feeling unsettled as I heard about the rise of Japan in elementary school.

But then something happened that very few of the ‘experts’ anticipated: Japan had an epic financial and economic meltdown.

It turned out that much of Japan’s meteoric rise during the 1980s had been the result of a massive and unsustainable financial bubble. The country’s central bank had been shoveling cash into the Japanese economy, and the national government was heavily subsidizing its corporations.

While interest rates were incredibly high in the US (mortgage rates in the mid-1980s were well over 10%), rates were dirt cheap in Japan, creating a boom in paper money.

And with so much money in their financial system, Japanese investors went on a shopping spree, both at home and abroad.

In addition to buying up trophy assets in America, Japanese assets also went sky high. In fact it was rumored at one point that Tokyo’s Imperial Palace was worth more than all the real estate in California combined.

And Japan’s Nikkei stock index surged six-fold during the decade, peaking at 38,915 on December 29, 1989.

But then Japan’s epic financial bubble burst… and all the fears of them taking over the world vanished.

The Nikkei plunged more than 82% from its peak, and more than 33 years later, the Japanese stock market still has not fully recovered!

History is not an absolute road map… but it is a useful guide and cautionary tale. And personally I see a number of parallels between Japan in the 1980s and China today.