<- Prev     Contents     Next ->

Chronicle of a Crash : Tokyo in the 1990s

How the market revved up

Indications of overvaluation

The one phrase to watch out for in any overheated market

The easiest way to pop a bubble

How the market revved up

Market expanded with the 1986 Nippon Telephone and Telegraph (NTT) privatization which brought hundreds of thousands of new investors into the market

Market bouyed by cheap money, a strong trade surplus and general optimism

Bank of Japan set discount rate at the very low level of 2.5 percent from early 1987 through mid-1989

Indications of overvaluation

Overall market was selling at a price-earnings ratio of over 50 in the late 1980s

For comparison P/Es in the US are normally around 15

P/Es for the Japanese market had been much lower in the early 1980s when growth prospects were better

• P/E of only 20 in 1982
• P/E of 32 in late 1985
• P/E of 50 in 1989

The one phrase to watch out for in any overheated market

It's different over here

or

It's different this time

The easiest way to pop a bubble

Have the central bank increase interest rates

Body text copyright 1997 by David Luhman