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Japan Officially Gets Leapfrogged by the Four Asian Tigers

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Japan Officially Gets Leapfrogged by the Four Asian Tigers

Japan Officially Gets Leapfrogged by the Four Asian Tigers

Throughout the decades in the 1950s and 1960s, the Japanese economy was envied for its unrelenting growth.

Dubbed the “Post-War Miracle”, this period of time saw Japan become a global center of manufacturing and exports. Japanese brands such as Toyota, Sony, Honda, Mitsubishi, Panasonic, and Canon would become household names worldwide. By the 1960s, Japan catapulted to become the second largest economy in the world.

Today, Japan has the third largest economy in terms of total nominal GDP, and the fourth largest by GDP adjusted for Purchasing Power Parity (PPP). This doesn’t seem so bad on paper, but Japan also has nearly 130 million people.

What do those amounts look like per capita? It turns out to be not so good.

After over two decades of economic stagnation, the most recent GDP per capita (PPP) numbers for 2014 by the IMF had the Japanese economy in 29th place globally. As you saw in the opening chart, even more recent projections from another source show that all four Asian Tigers have now all officially leapfrogged Japan in terms of GDP per capita (PPP).

The “Four Asian Tigers”, a term used to reference the highly free-market and developed economies of Hong Kong, Singapore, South Korea, and Taiwan, have continued to grow despite Japan’s struggles. Singapore, a significant Asian banking center, passed Japan in GDP per capita (PPP) back in 1979. Hong Kong would be the next to do so in 1993, and Taiwan would jump ahead during the Financial Crisis. The last of the leapfrogging happened when South Korea passed Japan this year.

This shouldn’t be too surprising, as the struggles of Japan over the last 25 years have been well-documented. However, a point of interest may be the context of how these challenges began.

In the mid-80s, the yen had basically doubled in value against the dollar. For a manufacturing and exporting nation (similar to how China is today), this was less than ideal. While this was happening, the Bank of Japan intervened with five sessions of monetary easing starting in January 1986 to weaken the yen, cutting interest rates from 5.0% to 2.5% in just one year.

During this time, monetary growth was much quicker than anticipated. More-than-sufficient liquidity and ultra low interest rates fueled speculation, which helped lead to inflate a classic asset bubble. In the early 90s, the BOJ hiked rates to counter speculation and curb inflation.

The asset bubble popped, and Japan’s economy would be sent into the “Lost Decade” – a “decade” which has lasted 25 years.

Japan, past 50 years of growth

You can see the drastic increase in money supply leading up to the crisis here:

Japan now has the world’s highest debt-to-GDP ratio of 243% as well as the world’s highest debt-to-revenue ratio.

Despite this, they’ve started an even more potentially dangerous experiment known as Abenomics, which is the three-headed beast of unprecedented quantitative easing, monetary stimulus, and reforms.

Original graphics by: Utopia – You’re Standing In It (blog), Trading Economics

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Markets

3 Reasons Why AI Enthusiasm Differs from the Dot-Com Bubble

Valuations are much lower than they were during the dot-com bubble, but what else sets the current AI enthusiasm apart?

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Two bubbles sized according to the forward p/e ratio of the Nasdaq 100 Index during the dot-com bubble (60.1X) and the current AI Enthusiasm (26.4x).

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The following content is sponsored by New York Life Investments

3 Reasons Why AI Enthusiasm Differs from the Dot-Com Bubble

Artificial intelligence, like the internet during the dot-com bubble, is getting a lot of attention these days. In the second quarter of 2023, 177 S&P 500 companies mentioned “AI” during their earnings call, nearly triple the five-year average.

Not only that, companies that mentioned “AI” saw their stock price rise 13.3% from December 2022 to September 2023, compared to 1.5% for those that didn’t.

In this graphic from New York Life Investments, we look at current market conditions to find out if AI could be the next dot-com bubble.

Comparing the Dot-Com Bubble to Today

In the late 1990s, frenzied optimism for internet-related stocks led to a rapid rise in valuations and an eventual market crash in the early 2000s. By the time the market hit rock bottom, the tech-heavy Nasdaq 100 Index had dropped 82% from its peak.

The growing enthusiasm for AI has some concerned that it could be the next dot-com bubble. But here are three reasons that the current environment is different.

1. Valuations Are Lower

Stock valuations are much lower than they were at the peak of the dot-com bubble. For example, the forward price-to-earnings ratio of the Nasdaq 100 is significantly lower than it was in 2000.

DateForward P/E Ratio
March 200060.1x
November 202326.4x

Source: CNBC, Barron’s

Lower valuations are an indication that investors are putting more emphasis on earnings and stocks are less at risk of being overvalued.

2. Investors Are More Hesitant

During the dot-com bubble, flows to equity funds increased by 76% from 1999 to 2000.

YearCombined ETF and Mutual Fund Flows to Equity Funds
1997$231B
1998$163B
1999$200B
2000$352B
2001$63B
2002$14B

In contrast, equity fund flows have been negative in 2022 and 2023.

YearCombined ETF and Mutual Fund Flows to Equity Funds
2021$295B
2022-$54B
2023*-$137B

Source: Investment Company Institute
*2023 data is from January to September.

Based on fund flows, investors appear hesitant of stocks, rather than overly exuberant.

3. Companies Are More Established

Leading up to the internet bubble, the number of technology IPOs increased substantially.

YearNumber of Technology IPOsMedian Age
19971748
19981137
19993704
20002615
2001249
2002209

Many of these companies were relatively new and, at the peak of the bubble in 2000, only 14% of them were profitable.

In recent years, there have been far fewer tech IPOs as companies wait for more positive market conditions. And those that have gone public, the median age is much higher.

YearNumber of Technology IPOsMedian Age
20204812
202112612
2022615

Ultimately, many of the companies benefitting from AI are established companies that are already publicly traded. New, unproven companies are much less common in public markets.

Navigating Modern Tech Amid Dot-Com Bubble Worries

Valuations, equity flows, and the shortage of tech IPOs all suggest that AI is different than the dot-com bubble.

However, risk is still present in the market. For instance, only 33% of tech companies that went public in 2022 were profitable. Investors can help manage their risk by keeping a diversified portfolio rather than choosing individual stocks.

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