top of page

Chapter 9 - Japan – The Proof  

    18 min read

If you share the view that humans are strikingly alike “wherever you go”, you are open to observing other people to get cues about where your society is headed. One can learn from folks who have gone through the same things … earlier. You apply this lesson every time you ask somebody “experienced” how they dealt with a particular challenge.

To get cues about where your society is headed – with you along for the ride – there is no better country to study than Japan. For a simple reason: the Japanese experienced many of the same things as other people did  in developed countries … earlier. Reviewing the Japanese experience will uncover the key force driving a country, including its economic development and outcomes in financial markets. That will allow us to peak into the future … and prepare for it.

Let’s start with the shortest of short histories of Japan.

Japan is a nation of islands, roughly the size of California or Germany. The characteristics of this island nation – distinct and distant from the Western world – make Japan a perfect comparative tool for Western countries, particularly the United States.

Up until the 1860s, Japan had very much closed itself off from the rest of the world. Only a small port town was open for business with Dutch merchants. This all changed when American Captain Perry and his black ships sailed into Tokyo Bay in 1853 and demanded an opening of trade. In the aftermath, the Japanese shogunate grudgingly signed trade and customs deals which heavily favored the Americans. It bought the Japanese some time. They understood that staying backwards would render them prey to eventual colonization. Instead, they opted to become a power and colonizer themselves.

With the toppling of the shogunate and the lifting of 15-year-old Meiji on the emperor’s throne in 1868, educated Samurais took charge. They jolted the country out of its two-century long isolation with maximum fervor. Japan underwent a stellar transformation from medieval tribal society to modern great power. The Japanese followed the German script. Japanese emissaries going abroad to study how leading Western countries organized themselves returned particularly impressed from Germany[1]. Germany, lacking natural resources and seemingly threatened by larger powers, looked to the Japanese in a similar predicament to theirs. 

Next the Japanese turbo charged their country’s metamorphosis. A capitalist infrastructure was set up in short order: The currency, the yen, was put on the bi-metallic standard in 1871. This greatly facilitated international trade. The Land Tax Reform of 1873 strengthened property rights by allowing for private ownership of land and its use as collateral for loans. The Tokyo stock exchange opened its doors in 1878. A central bank, the Bank of Japan (BOJ), was put in charge of the financial system in 1882. In 1886 compulsory schooling was introduced. These and other measures helped jumpstart the industrial modernization of the country.

When the Japanese defeated the Russian navy in a short war in 1905, the world took notice. Admittedly, the victorious Japanese ships were mostly built by the British. But it would not be long before the Japanese perfected ship building along with other industries. Sadly, they used their fledgling industrial and military prowess to begin a brutal campaign of subjugation and exploitation of foreign peoples and lands, first in Korea and then in Chinese Manchuria and beyond.

Their militaristic expansion abroad evolved before a backdrop of very high population growth at home. While the Japanese population hovered around 35 million during its period of isolation, it leaped to 56 million by 1920. This was largely the result of a jump in the birth rate by around 40% from 1875 and 1920[2].

Eventually, the Japanese attempt to expand their influence in Indochina collided with the aspirations of another rising power, the United States. In July 1941, the US imposed a crippling oil embargo on Japan. The Japanese escalated the conflict with an attack on Pearl Harbor on December 7, 1941. Two nuclear bombs dropped on the city centers of Hiroshima and Nagasaki on August 6 and August 9, 1945, respectively, settled the score.

It may seem crazy in hindsight for the Japanese to have taken on the United States militarily. At least in demographic terms it wasn’t. True – the US population was almost twice the size of the Japanese in 1940 (132 million vs 73 million, resp.). However, American birth numbers were only fractionally higher than those in Japan during the 1930s. American women had gone on a birth strike during the Great Depression, while Japanese cradles teamed. State propaganda in Japan promoted large family size. In 1941, the Japanese government set a population target of 100 million by the early 1960s. As other imperialist nations before and since, Japan then did everything to keep its population growing and so producing the key ingredient in warfare – young men.

High birth rates continued in Japan immediately after the war. Between 1947 and 1949, Japanese mothers gave births to nearly 2.7 million babies per year. However, high population growth was now increasingly viewed as a threat to peaceful prospects for the nation. In 1948, Japan legalized abortion. Births collapsed. By 1953, they had dropped to below 1.9 million, a 30% decline from only four years earlier.

In the US by contrast, the baby boom just started. The highest numbers of births were recorded in the late 1950s, at over 4 million babies per year, before dropping off sharply. As the following chart shows, a 10-year gap emerges in the birth cycle between the two countries. This 10-year gap is also manifested in fertility rates (the average number of babies born to a woman over her life span). Eventually the trajectories of both diverged, with the birth and fertility decline in Japan more pronounced.


Source: Live Births: Japan – Ministry of Health, Labour and Welfare; US – National Center for Health Statistics; Fertility – UN Population Prospects, 2022 Revision, own graph

The economic recovery of Japan after WWII is legend. From 1950 to 1970, the Japanese economy grew over 10 percent p.a. in real terms (i.e. adjusted for inflation). Many factors contributed to this stunning feat, not least a cheap yen. Fixed at 360 per USD in the Bretton Woods system, it provided a strong tailwind for the Japanese export industry. Japanese exports were initially confined to rather low-tech steel and textile products. In time, electronics and cars followed. Before long, Japanese companies would set the standards of perfection in many industries.

1973 put a sharp dent into the stellar economic track record. The oil shock hit Japan harder than any other developed country and induced a sharp recession. Inflation skyrocketed to over twenty percent.

Then the MIRACLE happened. Inflation trended down in Japan. Essentially ever since. It would never get anywhere near its peak rates in 1973 again to the day of this writing. This happened in Japan roughly a decade before it would happen in the United States.


Source: FRED (Economic Research, Federal Reserve Bank St. Louis), own graph

As a matter of fact, from the 1970s onwards, pretty much every big development in the economy and financial markets happened in Japan roughly 10 years before it did so in the US and Europe as we shall see.

By the early 1980s, the Japanese industrial juggernaut made itself felt in the US and Europe. Western countries began to see Japanese imports as an existential threat to key industries and pushed back. They forced trade concessions on the Japanese. They also wanted the yen to strengthen to make Japanese imports more costly for Western consumers. That materialized with the “Plaza Agreement” negotiated in New York in 1985. The deal helped drive the yen’s appreciation from around 250 per dollar to less than 150 within one year. While the strengthening yen slowed down Japanese exports to the US and Europe, it increased the purchasing power of the Japanese abroad.

Japanese money was now popping up all over the world. Japanese buyers were gobbling up Western companies, real estate and even art in bulk. The banking hierarchy epitomized the new reality: While no Japanese bank ranked among the top five in the world as measured by the size of their assets in 1982, by 1986 ALL five largest banks were Japanese.

Trade surpluses also led Japan to move from debtor to creditor country in the early 1980s, meaning that the Japanese owned more foreign assets than foreigners owned in Japan. It’s a rather murky statistic, but it was heralded in Japan as a sign of national greatness and superiority. In short it was considered something “new”. Importantly, it was deemed to guarantee low interest rates for good. These in turn would justify ever higher valuations of shares and real estate. And indeed, prices of both began to skyrocket in the early 1980s.

The crash of the US stock market on Monday, October 19, 1987, when the Dow Jones Index dropped 22.6%, did lead to a drop in Japanese share prices, too. But the drop was less pronounced in the Japanese stock market, which by every measure was much more overvalued than the American market. Before long, the Nikkei225-Index, the key stock market barometer in Japan, went vertical again for the remainder of the decade. The Crash of ’87 ended up reinforcing the bubble in Japan.

By the end of 1989, a set of statistics was amazing: Japanese shares accounted for nearly 40 percent of the total size of the entire stock market value of the developed world versus 30 percent for the US. This was thanks to a more than 5-fold increase of the Nikkei-Index over the decade. Japanese real estate had reached even more stratospheric valuations. The grounds of the emperor’s palace in Tokyo achieved a higher value than all of California.

Japanese public finances were the envy of the world at that point. The country was essentially free of any public debt. From 1988 to 1992, the Japanese government recorded its first budget surpluses since WWII. It would also be the last.

Japanese success seemed total at the end of the 1980s. At least on the surface ….  

… of a giant bubble. Arguably, the world’s biggest ever. It popped at the very start of 1990. Rising inflation led the Japanese central bank to tighten the screws. Small rises in the base interest rate in 1989 followed bigger ones in 1990. By August 1991, the BOJ had lifted the base rate to 6%.

Stock prices dropped sharply starting in 1990. By the spring of 1992, stocks had lost two thirds of their value before temporarily recovering. Real estate prices began their long decline in 1991. The lower asset values led to huge losses in the banking system when the collateral value of loans evaporated. Economic growth plummeted as did inflation. In response, the BOJ gradually took interest rates down. By September 1995 the base rate was lowered to 0.5%. At the outset, the slowdown seemed orderly. No recession materialized.

However, all hell was about to break loose. In the summer of 1997, the fuse was lit in Thailand to an economic and financial crisis that eventually would wreak havoc in Asia and beyond. The unfolding Asian crisis would become the world’s greatest financial crisis since WWII to that date. It carried substantial Japanese ownership.

Thailand had pegged its currency to the US dollar in the mid-80s. This attracted streams of “hot” money in search of higher returns, as those seemingly came with no currency risk. When it became clear that a much foreign investment had gone sour, and worse, that the Thai central bank’s foreign currency reserves were fraudulently overstated, a flight of capital set in. On July 2, 1997, the Thai Baht was “floated”. It promptly sank like a stone. By the end of the year, it had lost half of its value against the US dollar.

Indonesia, Malaysia, and South Korea were next in line to see foreign money flee and leave broken economies, with companies and banks collapsing along with the countries’ currencies.

Then the full impact of the Asian crisis hit the nation from where it had substantially originated – Japan. Japanese banks were THE key lenders to Asian countries in the early 1990s, holding over 35% of Thailand’s external debt and 40% of Indonesia’s by 1996. When Japanese banks faced trouble at home by the mid-90s, they began to curtail lending abroad. This was a key force pulling the carpet from underneath these Asian nations.

Festering problems in the Japanese banking sector came to the full fore with the collapse of Japan’s 10th largest bank in November 1997. In the same month, two brokerage firms, Sanyo Securities and Yamaichi Securities, Japan’s 4th largest, went bankrupt. That sent Japanese authorities into full crisis fighting mode … and pioneer the set of tools US authorities would employ 10 years later after Lehman Brothers had gone belly up in September 2008.

The recovery of the Japanese economy from the Asian Crisis was lackluster. The 1990s entered history as the “Lost Decade”. The economy had grown a meager 15 percent in real terms over the 1990s. Economic decline became visible. Homelessness emerged in big cities. The stock market reflected the malaise: The Nikkei-Index ended the decade 60 percent lower. Japan’s weight in the world’s stock market index had dropped to 11 percent. Government debt had grown to over 130 percent of GDP. 

Contrast this to the United States: There the 1990s mirrored the booming 1980s in Japan. The US economy had grown 37 percent in real terms over the decade. Stock prices went off the charts with the Dotcom boom and made it clear that US firms were dominating the new internet age. Like the creditor status in the early 1980s was taken as something “new” in Japan so was the tech revolution in the US a decade later. Both were used as arguments to discard old valuation metrics of stocks.

The US Federal Reserve did in the Asian Crisis what it always did and would do during real or perceived financial crises. It came to the rescue of financial institutions and speculators having gotten it wrong. A giant American hedge fund called Long-Term Capital Management, found itself in huge short-term trouble during the turmoil of the Asian crisis. It and the broader financial markets got help from the FED. Time magazine celebrated Greenspan as part of “the committee that saved the world”[3]. Promptly the US stock market went vertical after the Asian crisis. In Japan 10 years earlier, Japanese stocks skyrocketed after the Crash of ’87. The Asian crisis achieved the same in the US – it reinforced the bubble.

By the end of the 1990s, it was the US that possessed an amazing set of statistics. The S&P500 Index ended the decade up over 4-fold. Now the US stock market accounted for over 50% of the size of the world’s stock market. Like in Japan 10 years earlier, US public finances seemed in great shape: the country recorded its first budget surpluses since WWII. It would also be the nation’s last. Unequivocally, the US was the undisputed sole superpower after the demise of the Soviet Union earlier in the decade.

Seven years later, in 2007, the Great Financial Crisis (GFC) began to take shape. The American authorities mimicked the actions of the Japanese from a decade earlier during the Asian Crisis as the below table highlights. It was as if they had copied the Japanese crisis manual:


Once again a decade in the US mirrored the previous one in Japan!

The Noughties in the US became a replica of the 1990s in Japan. They were never titled a “Lost Decade” even if that term would have been appropriate. Nobel Laureate Paul Krugman suggested “The Big Zero”[4]. The US economy grew only 19% in real terms over the decade. The stock market had gone nowhere over the 10 years. The GFC left its ugly footprint all over the economic and financial statistics. Particularly, in the books of the government. Government debt had skyrocketed. It had now reached nearly 100 percent of GDP, similar to where Japan had found itself a decade earlier.

Arguably, the “Big Zero” did not end. The US economy remained on life support from the FED and Treasury well into the 2010s. Over this decade, the US economy did not grow more than 3 percent in any year. Still, overall, the US economy did better than other developed economies.

The malaise was bigger in Japan. The country was hit hard by the GFC in 2008. Not enough, a worse disaster was waiting in the wings. A giant Tsunami hit Japan’s main island in March 2011 and led to disaster at the Fukushima nuclear power plant. It was a flirt with the apocalypse.

Japan placed its hopes on a new Prime Minister in 2013 whose name titled the country’s new blueprint for economic recovery. “Abenomics” was supposed to inject growth momentum into the economy through a set of market liberalization measures and government stimuli. Crucially, Abe also heaved a new governor into the seat of the BOJ.

Like other central bankers in the US and elsewhere, the new governor threw the rule book of central banking overboard and embarked on a campaign of massive money printing and monetization of government debt. Like other central banks, the BOJ’s balance sheet ballooned. The BOJ added ever more debt of the Japanese government on its balance sheet … and paying for with newly created reserves. It even bought Japanese shares in bulk.

Abe stepped down in September 2020. In early 2023 his BOJ governor followed. The verdict on Abenomics was dismal. It was no cure for the country’s ills. Most importantly, births continued their decline, taking all hope for future prosperity with them. In 2016, births dropped to below one million, lower than at any time since record keeping began in 1899. In 2023, they fell below 760’000. In the meantime, the number of 100-year-olds had increased to over 92’000.

The aging in Japan remains on an unstoppable march. It must be seen as THE gamechanger. Of everything. Particularly in the sphere of economics and financial markets.

To recap: Japan’s boom and bust cycle preceded that of the US by a decade. The booming 1980s in Japan were mirrored in the 1990s in the US. Both countries experienced a lost decade thereafter.  The time-lagged comparison also applies to the countries’ demographics. If lagged by a decade, near identical age structures of the populations of the two countries emerge.

Age Structure: percentage of population in resp. age cohort (5-year cohorts):


Source: UN Population Prospects, 2022 update, own graphs

The bubble periods happened with a backdrop of a downtrend in inflation in either country: in Japan the downtrend in inflation began in the early 1970s (after the oil shock), in the US in the early 1980s (after the Volcker shock).

There can only be one conclusion. At the heart of the changes in the price cycle – i.e. from inflation to disinflation and eventually deflation – lies changing demography.  The MIRACLE of low inflation is a byproduct of an aging society. EUREKA. 

No matter how reckless the spending of governments and the money printing by central banks, the deflationary pressure from aging demographics has remained all powerful.

The analogy to chocolate is appropriate. There is a time when you were young and probably could eat chocolate in any amount …yet not see a change to your waistline. Eating chocolate in middle age will lead to a different outcome. Your metabolism has changed.

Aging amounts to a profound change in the metabolism of society.  Fighting the natural economic outcomes of an aging society does little good. It only accelerated demographic decline. Japan experienced this first.  

If you think about it – it’s logical: Babies and kids only consume as do retirees. People in their working-ages produce and consume and save the difference.  As the sizes of these groups change, so does everything else: The demand for diapers, for schoolbooks, cars, houses, cruises, nursing homes etc. And, of course, that for money. The dependency ratio measures the size of the group of dependents, i.e. children and retirees, vs the working-age group. With the dependency ratio changing due to the aging of society so does demand and supply for savings among many other variables.

We should not be surprised about a relationship between the two. Even on a global scale. As the US dollar is the global currency the demand for dollars is subject to global forces:



Source: The Global Effects of Asia’s Aging Population, Credit Suisse, 2022, p. 55

Equipped with this understanding, we can see the world with new eyes. And understand that economic science must put changing demography in its center. Sadly, that has not been the case in the past.

The implications from the realization that outcomes in the spheres of economics and financial markets are tightly linked to demography are vast.  And life changing as the last chapter argues.



[1] Wagner, W. (2018). Japan - Abstieg in Würde: wie ein alterndes Land um seine Zukunft ringt. Deutsche Verlags-Anstalt.

[2] Morland, P. (2020). The Human Tide: How Population Shaped the Modern World. John Murray.

[3] TIME Magazine Cover: Rubin, Greenspan & Summers.(1999, February 15).,16641,19990215,00.html

[4] Krugman, P. (2009, December 27). Opinion | The Big Zero. The New York Times. Retrieved February 26, 2024, from

Ch 9_Pic 3_edited.png
bottom of page