Lesson's from Japan's Lost Decades

Following an epic collapse of double bubbles in the stock market and real estate prices, Japan “suffered” 2+ decades of stagnation and deflation.

You would be hard pressed to find somebody who hasn’t at least heard of Japan’s Lost Decade(s.) It’s a popular topic people raise as soon as our early retirement and living off an investment portfolio comes up in polite conversation.

“Oh man, what are you doing to do when the United States (inevitably) experiences it’s Lost Decade(s)?!”

“20 years of 0% investment performance is bound to put a dent in your retirement plans, hehe”

“I want to retire early too but I’m really concerned about a Japan-style financial collapse. What can I do?”

That last question is probably the best – What lessons can we learn from Japan’s challenging times?

Japanese Stock Market Collapse

Japan has experienced one of the most famously drawn out stock market recoveries (or lack thereof.)

On December 29, 1989, the Nikkei 225 peaked at 38,957.44. Thirty+ years later, the index is around 23,500, a total decline of about 40%.

This is not a pretty picture.

Nikkei 225

Nikkei 225 Performance (data: source)

If we adjust for inflation and reinvest dividends along the way, the decline is slightly improved to (only) -17%. That is an annual return of -0.638% for 30 years.

When you put that number into any retirement calculator, it tells you that you can never retire.

The 4% Rule

The 4% rule is a decent guide for retirement spending for a US person.

But… what would have happened if you had lived/invested in Japan and retired at the end of 1989 with a record high stock market with a high equity allocation, planning on spending 4% for life?

As the iPhone autocorrect says, you would have been royally ducked.

A portfolio of 100% stocks would have failed in 13 years. A 60/40 Japanese stocks/bonds portfolio would have failed in 19 years. By contrast, the worst retirement experiences in US history were fairly tame. (Check out the gory details for 1965 and 2000 and 2008.)

4% rule for Japan 1990

Lessons from Japan

A 4% withdrawal rate failed to survive 30 years in Japan.

So did a 3% withdrawal rate, a 2% withdrawal rate, and all variable withdrawal methods. (A 1.6% withdrawal rate would have worked for 30 years but no more, and an 80%+ bond allocation would have done well.)

So what would have helped? 2 1/2 things:

International Allocation

At the peak in 1989, the Japanese stock market represented ~50% of the world market capitalization. This was with only 15% of global GDP and 2% of world population (and shrinking.) Not bad for an export economy with few internal natural resources.

Today, the numbers for Japan are ~8% of world market cap, ~6% of GDP, and <2% of world population.

Taking an index approach (holding assets in proportion to their global market cap) would have resulted in equity holdings of 50% Japan / 50% Rest of World, which would have made all the difference:

Japan 1990 4% rule with international allocation

This is part of the reason that we hold international equities.

This is especially crucial for people who live in small market cap countries – we are currently in Taiwan which represents about 2% of global equity market cap. Do I want 100% of my equity allocation in 2% of the world? No, I want 2% in Taiwan, 2% in Australia, 3% in Canada, 5% in the UK, 8% in Japan, etc…

Be Mindful of Valuations

High valuations generally lead to low future returns. At the peak, the Nikkei 225 had a CAPE of nearly 100 (today it is ~22.)

For the equivalent valuation in the US, the S&P500 would need to more than triple overnight. (The US S&P500 CAPE is ~30.)

If that happened, I would be selling US stock and buying bonds and international equities. (See our portfolio.)

Market timing? No. It’s just rebalancing.

Requires superhuman intelligence? No, it’s just standard Modern Portfolio Theory asset allocation.
(MPT states that when one asset in your portfolio grows out of proportion with the other assets, you should sell some of it and buy the others. )

Circa 1989 Japan investors, especially retirement minded investors, should have done the same.

Don’t go 100% cash to 100% stock at extreme valuations

Most of these analyses start the same way… “assume you have $1 million equivalent in JPY at the end of 1989 and retired. What happens?”

But what about the lead up to that date? Did an investor go from 100% cash to 100% equities at the peak? Probably not.

In the 7+/– years prior the Nikkei 225 was up 400%+, a return of 26%+ per year. For context, had the US market 7-year return been the same, the S&P500 would currently be around ~7,500 (current value = ~3,000.)

If you estimated that you could retire within 10 years (perhaps based on this data), but you reached your savings target within 3…

… do you proclaim to the world that you are an investing god?

… Or do you practice a small bit of humility, rebalance your portfolio and build a small cash cushion, and carefully consider your timeline?

(See “Be Mindful of Valuations”)

Don’t fall victim to one of the classic blunders – The most famous of which is ‘never get involved in a land war in Asia’ – but only slightly less well-known is this: ‘Don’t invest 100% of your life savings in a single asset class with unprecedented valuation and let it ride.”

“But This Could Never Happen in the US”

I’ve seen this general comment quite a few times: “It couldn’t happen here, because <insert reasons.>”

They are always really good reasons. But, multiple decades of zero return have happened in the US multiple times:

  • The Nasdaq from peak in 2000 to start of 2015 has had a real CAGR of -1.9%
  • The S&P500 from Oct 1929 to Oct 1943 and from Jan 1966 to Jan 1983 returned 0%

In fact, the reason the 4% rule is not the 5% or 6% rule is because of these historical periods.

Could such a period happen again? Of course.

At present, the US represents:

55% of world equity market cap (CAPE ~31) (Japan 1989: 50%, CAPE ~100)
23.89% of world GDP (Japan 1989: 15%)
4.3% of world population (Japan 1989: 2%)

Before the Great Depression CAPE peaked at ~30. In 2000, it peaked at ~44.

At present, the market is overvalued compared to historical periods and compared to non-US markets. But not nearly to the same degree as Japan in 1989.

Sources & Methodology

To create the Japan 4% rule charts above, I used data from these sources:

Japanese bond returns: 1 year & 9 year
Japan CPI
Nikkei 225 total return (includes reinvested dividends)
Japan “foreign equities” – MSCI ex-Japan index (in USD – convert to JPY.)
USD JPY exchange rates – FRED
Boglehead’s Japan thread (couldn’t connect to same data sources, but reverse engineered for data)

Then, I created an ugly equivalent of cFIREsim for a single start date that allowed me to experiment with different asset allocations (Nikkei 225, Japan bonds (1 or 9 year), ex-Japan index.) All numbers calculated in Japanese yen.


Is the United States and the rest of the world destined to repeat Japan’s 20+ year downturn? Would we be better off investing in ammunition and food rations due to economic collapse? Should we expect multiple decades of 0% investment return?

Probably not. At least not without first having stock markets double or triple whilst earnings remain flat.

But based on the Japan experience, we can take some steps to minimize the already slim chance that it happens “here.”

Hold some international allocation, be mindful of valuations, and follow good portfolio rebalancing practices. Then, even in the worst of times, a well-diversified global portfolio is likely to carry you through. It worked in Japan, afterall.