The Long Shadow of 1989: Japan’s Markets Against the Developed World

The 1960s — Post-War Growth and Equity Strength

The 1960s marked Japan’s transition from post-war reconstruction into an era of rapid industrial expansion. Economic growth averaged over 10 per cent annually, fuelled by exports, productivity improvements, and government-led investment. Equity markets reflected this dynamism. The Nikkei 225 delivered double-digit annual returns, consistently outpacing the developed world average (Dimson, Marsh, and Staunton 2021). There was no smooth trajectory—markets experienced sharp corrections such as the 1962 ‘Kennedy Slide’ in the U.S. and a 14 per cent fall in Japan in 1963—but the overall trend was unambiguously positive.

In the U.S. and Europe, equities also performed strongly, though at more moderate levels. The S&P 500 grew by nearly 8 per cent per year in nominal terms, supported by a decade of expansion but tempered by rising inflation towards the end of the period (Campbell and Shiller 1998).

Government bonds offered modest compensation to investors. U.S. Treasury yields, which had been anchored around 3 per cent in the 1950s, rose to nearly 6 per cent by the end of the decade as inflation pressures built (Credit Suisse 2023; FRED 2025a). UK gilts followed a similar trajectory, rising from around 6 to over 9 per cent (FRED 2025b). In Japan, bond yields are reconstructed from Hattori (2020), who estimates 10-year JGB yields from 1961 to 1984. His data suggest Japanese yields in the 1960s averaged between 6 and 7 per cent, consistent with high growth and emerging inflation pressures. For bondholders, the result was subdued real returns, as the benefit of higher coupons was offset by falling bond prices.

The 1970s — Inflation, Oil Shocks, and Real Losses

The 1970s were dominated by stagflation and oil price shocks. Japanese equities, which had surged in the previous decade, delivered annualised nominal returns of around 12 per cent, but high domestic inflation meant real returns were slim (Credit Suisse 2023). The decade was punctuated by extreme volatility. The Nikkei lost over a quarter of its value across 1973–74, only to rebound strongly in 1975. In the UK, investors endured even more violent swings: a real drawdown of 71 per cent during the 1973–74 crash followed by a near doubling the next year (Dimson, Marsh, and Staunton 2021).

For Western investors, the 1970s were punishing. U.S. equities lost purchasing power over the decade, with the S&P 500 producing a negative real return of about 1 per cent per year (Campbell and Shiller 1998).

Government bonds fared even worse. Rising inflation devastated fixed income investors. U.S. Treasury yields rose from 6 per cent in 1970 to more than 10 per cent by 1979, peaking close to 15 per cent in 1981 (Credit Suisse 2023; FRED 2025a). UK gilt yields followed a similar pattern, climbing into double digits as inflation became entrenched (FRED 2025b). Hattori’s (2020) reconstructed JGB series shows Japanese 10-year yields spiking above 8 per cent after the 1973 oil shock before stabilising later in the decade. Across all developed markets, bondholders faced negative real returns for most of the 1970s—one of the worst periods for fixed income in modern history.

The 1980s — A Golden Age and the Making of a Bubble

The disinflation of the early 1980s ushered in a golden era for equities and bonds alike. Nowhere was this more visible than in Japan. The Nikkei 225 rose nearly sixfold over the decade, compounding at close to 19 per cent annually (Credit Suisse 2023). Corporate profits grew, the yen appreciated, and speculative enthusiasm took hold. By the late 1980s, valuations had reached unprecedented extremes. The average price–earnings ratio on Japanese equities exceeded 50, whilst Tokyo property prices suggested that the grounds of the Imperial Palace were worth more than the entire state of California.

Western markets were also buoyant. U.S. equities returned over 17 per cent annually, aided by economic reforms and declining interest rates (Campbell and Shiller 1998). The 1987 crash provided a reminder of equity volatility, with markets falling over 20 per cent in a single day, but prices recovered quickly.

For government bonds, the 1980s were a golden age. Paul Volcker’s fight against U.S. inflation pushed Treasury yields to nearly 15 per cent in 1981, but as inflation receded yields fell steadily, reaching around 8 per cent by 1990 (FRED 2025a). That decline in yields created substantial capital gains, alongside generous coupons, producing real returns of more than 6 per cent annually (Dimson, Marsh, and Staunton 2021). UK gilts followed a similar pattern, with yields falling from 15 to around 10 per cent across the decade (FRED 2025b). In Japan, Hattori’s (2020) reconstructed data show yields peaking near 7 per cent in the mid-1980s before drifting lower, a trend confirmed by the official post-1980 FRED series (FRED 2025d). For retail investors, this was the rare period when both equities and bonds delivered exceptional results.

Figure 1. This chart shows the cumulative performance of the Nikkei 225 and the S&P 500 price indices from 1960 to 2025, normalised to 1.0 at the start. The Nikkei surged through the 1970s and 1980s, peaking dramatically in 1989 at the height of Japan’s asset price bubble, before entering a long period of stagnation and volatility. By contrast, the S&P 500, though punctuated by downturns such as the dot-com crash and global financial crisis, has compounded steadily and surged since 2010, leaving it far ahead of Japan over the long run.

It took until 22nd February 2024 for the Nikkei to set a new landmark by surpassing its 1989 peak.

The 1990s — Japan’s Lost Decade, America’s Boom

The bursting of Japan’s bubble in 1990 triggered one of the most dramatic reversals in modern financial history. The Nikkei fell 39 per cent in that single year and would go on to lose over 60 per cent of its value by 1992. Throughout the 1990s, the index never recovered—indeed, the decade ended with Japanese equities still half their 1989 level (Hoshi and Kashyap 2011). Economic stagnation, banking crises, and entrenched deflation created a toxic backdrop for equity investors.

The contrast with the United States could not have been greater. The S&P 500 compounded at 18 per cent annually in the 1990s, one of its strongest decades on record, propelled by rising productivity, globalisation, and the technology boom (Campbell and Shiller 1998). Europe and the UK also enjoyed robust returns. Valuation effects explain much of this divergence—falling multiples in Japan subtracted about 3 per cent per year from equity returns, whilst rising valuations added close to 2 per cent to U.S. results (Dimson, Marsh, and Staunton 2021).

Government bonds provided stability and surprisingly high real returns. In the U.S., 10-year Treasury yields fell from around 8 per cent in 1990 to 6 per cent in 2000, generating annualised real capital returns of more than 4 per cent (Credit Suisse 2023; FRED 2025a). UK gilts delivered similarly strong capital gains as yields fell from double digits in the early 1990s to about 5 per cent by the end of the decade (FRED 2025b). Japan saw an even more dramatic shift: long-dated JGB yields collapsed from 7 per cent in 1990 to barely 1 per cent by 2000, driven by deflation and aggressive monetary policy (Hattori 2020; FRED 2025d). For Japanese investors, bonds became a rare source of stability—in the form of capital appreciation—as equities stagnated.

The 2000s — Twin Bear Markets

The new millennium delivered little joy to investors. The collapse of the dot-com bubble from 2000 to 2002, followed by the global financial crisis in 2008, created two severe bear markets in less than a decade. Japanese equities suffered fresh losses—the Nikkei lost around 45 per cent across the decade—whilst U.S. equities also disappointed, with the S&P 500 producing a slightly negative annualised return (Cochrane 2011). European and UK investors faced similar struggles, with indices finishing the decade close to where they began.

Government bonds once again proved their worth. In the U.S., 10-year Treasury yields fell from 6.5 per cent in 2000 to 3.8 per cent by the end of 2009 (FRED 2025a), providing a tailwind to returns. Real bond returns across developed markets were in the range of 3–4 per cent annually (Credit Suisse 2023). UK gilt yields fell from around 5.2 to 4.0 per cent, with strong total returns during the crisis years (FRED 2025b). Japan had already reached the lower bound—10-year JGB yields hovered around 1 per cent through most of the 2000s (FRED 2025d). For Japanese investors, bonds provided safety but negligible income, whilst for U.S. and European investors, bonds were the clear outperformer of the decade.

Figure 2. The chart tracks 10-year government bond yields for the U.S., U.K., Germany, and Japan from 1960 to 2025, highlighting both their common patterns and Japan’s unique path. Yields in the U.S., U.K., and Germany climbed steadily through the 1960s and 1970s, peaking above 15 per cent in the early 1980s as inflation surged, before entering a four-decade decline that saw European yields dip into negative territory by the late 2010s. Japan followed a similar pattern until the mid-1980s—estimated using Hattori’s data pre-1980—before diverging sharply. Japanese yields collapsed to near zero by the late 1990s and were held there by deflationary pressures and Bank of Japan policy, in stark contrast to other developed markets. The recent uptick in yields since 2021 is visible across all four regions, but Japan remains lower than its peers.

The 2010s — Abenomics and the Global Bull Market

The 2010s saw a remarkable recovery. U.S. equities entered one of the longest bull markets in history, returning more than 13 per cent annually. Europe and the UK recovered more modestly, hampered by the Eurozone debt crisis and slower growth. Japan finally enjoyed a period of strength. Under Prime Minister Shinzo Abe’s reform programme and the Bank of Japan’s aggressive monetary easing, the Nikkei more than doubled between 2012 and 2019 (Hoshi and Kashyap 2011). For the first time in decades, Japanese investors experienced sustained positive equity returns.

Valuations diverged markedly by the end of the decade. The U.S. traded at historically rich multiples, with cyclically-adjusted price–earnings ratios above 30 (Campbell and Shiller 1998). Japanese equities, by contrast, remained relatively cheap, reflecting decades of underperformance and ongoing demographic headwinds.

For bonds, yields reached extraordinary lows. The U.S. 10-year Treasury yield fell from 3.8 per cent in 2010 to under 2 per cent by 2019 (FRED 2025a), whilst UK gilts followed the same path, reaching around 0.8 per cent by the decade’s end (FRED 2025b). In Europe, German Bunds turned negative, yielding –0.3 per cent by 2019 (FRED 2025c). In Japan, the Bank of Japan capped 10-year yields at around 0 per cent through its policy of yield curve control (FRED 2025d). Bonds offered almost no return at all. For investors, this decade marked the culmination of a forty-year bull market in government bonds—one that left little room for future capital gains.

The Long Sweep Since 1990

Cumulatively, the last 35 years present a sobering picture. Japanese equities have delivered just over 1 per cent per year in local-currency terms, compared with close to 10 per cent for U.S. equities and about 7 per cent for Europe (Dimson, Marsh, and Staunton 2021). Government bonds, particularly in the U.S. and UK, provided strong real returns as yields collapsed from the early 1980s to the mid-2010s. In Japan, however, yields quickly approached zero, and government bonds offered little more than modest capital preservation (Hattori 2020; FRED 2025d).

The lessons for retail investors are clear. Valuation matters—buying into extremes, as Japanese investors did in 1989, can condemn portfolios to decades of stagnation. Diversification matters even more—Japan was the largest stock market in the world at its peak, but global investors who spread their bets across regions fared far better. And patience is essential—markets can languish for decades, even in advanced economies.

References

Campbell, John Y., and Robert J. Shiller. 1998. ‘Valuation Ratios and the Long-Run Stock Market Outlook’. Journal of Portfolio Management 24(2): 11–26.

Cochrane, John H. 2011. ‘Discount Rates’. Journal of Finance 66(4): 1047–1108.

Credit Suisse. 2023. Global Investment Returns Yearbook 2023. Zurich: Credit Suisse Research Institute.

Dimson, Elroy, Paul Marsh, and Mike Staunton. 2021. Triumph of the Optimists: 101 Years of Global Investment Returns. Princeton: Princeton University Press.

FRED. 2025a. ‘Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity, Quoted on an Investment Basis’. Federal Reserve Bank of St. Louis. Accessed September 2025. https://fred.stlouisfed.org/series/GS10

FRED. 2025b. ‘Long-Term Government Bond Yields: 10-Year: Main (Including Benchmark) for the United Kingdom’. Federal Reserve Bank of St. Louis. Accessed September 2025. https://fred.stlouisfed.org/series/IRLTLT01GBM156N

FRED. 2025c. ‘Long-Term Government Bond Yields: 10-Year: Main (Including Benchmark) for Germany’. Federal Reserve Bank of St. Louis. Accessed September 2025. https://fred.stlouisfed.org/series/IRLTLT01DEM156N

FRED. 2025d. ‘Long-Term Government Bond Yields: 10-Year: Main (Including Benchmark) for Japan’. Federal Reserve Bank of St. Louis. Accessed September 2025. https://fred.stlouisfed.org/series/IRLTLT01JPM156N

Hattori, Takahiro. 2020. ‘Estimation of 10-Year JGB Yields: From 1961 to 1984’. SSRN Electronic Journal. November 21, 2020. https://doi.org/10.2139/ssrn.3734887

Hoshi, Takeo, and Anil K. Kashyap. 2011. ‘Why Did Japan Stop Growing?’. Journal of Economic Perspectives 25(1): 141–66.