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03/30/2008: "Japan's 'lost decade': the new bogeyman for post credit-crisis stockmarkets "

Japan's 'lost decade' of the1990s is rapidly becoming the bogeyman of stories about the future for the world economy and stock markets in the wake of the credit crisis. The same fate supposedly awaits the US (and UK too) as payday for a decade of binge banking and mass delusion by bankers and their customers about house prices. In a new position paper, wealth manager No Monkey Business examines the relevance of Japan's dire experience of the '90s for other countries today.

The key distinction is the duration of the underperformance against expected growth in economies and equity real returns, rather than the cumulative degree. Prolonged underperformance is possible in Anglo-Saxon markets because of the specific effects of a bursting housing bubble, even if Japan is not a close parallel. For wealth managers, the lesson of Japan is that both the degree and duration of underperformance against rationally-expected returns need always to be a part of the realistic outcomes we tell clients about: they are more likely than people think. For Japan itself, the lesson is that the rational 'mean reversion' model of real equity returns is not broken and because of low expectations it now offers the best long-term returns of the major markets. And the yen looks cheap against sterling.