11 APRIL 1998, Page 26


It's witchcraft: bubble, bubble, toil and trouble, their shares halve and your shares double


You might wonder whether Japan and America are on the same planet. They are the world's two biggest economies, but if you look at them as they are mirrored in their stock markets, you would think that America was going to the moon while Japan was being wiped off the face of the earth. Indeed, at the preposterous Asia Europe Meeting in London last weekend, the hosts were offering to pass the hat round. Japan's stock market peaked eight years ago and has since lost well over half its value. (Even ours is worth more, these days.) America's has doubled in three years. Its traditional measuring-rod, the Dow Jones index, pushed its way above 4,000 as 1995 began and headed for uncharted territory. Along the way Alan Greenspan, the sage of the Federal Reserve, cautioned it against irra- tional exuberance. It shrugged his warnings aside and has gone charging through 9,000. Somehow the planetary economy can be booming on one side of the Pacific and bust to the wide on the other. We can see now what went wrong with Japan. It was blown up into a bubble of money, and burst. Those bizarre calculations that showed the Imperi- al Palace gardens to be worth more than the state of California — those were the signs of asset price inflation. We ought to know by now that inflation does not stop at the price of eggs, and that excess money can get into the price of land and houses, and shares, too. When the bubble bursts, asset prices fall, lenders see their security disappearing, credit contracts, businesses fold, their banks become bankrupt and the spiral carries on downwards. The Japanese made it worse for themselves by refusing to face this unpleas- ant reality. If they will face it now, they and their market may get somewhere.