In the global stock market downturn of 1987, Japan was undoubtedly the most resilient, with a drop of only 15% before stabilizing. As a result, global capital flowed into Japan at an even more frenzied pace.
Even before the yen appreciated, the highly sensitive capital had already sensed the opportunity and eagerly converted other currencies into yen, pouring them into Japan's capital markets. To offset the impact of the yen's appreciation on the real economy, Japan announced various measures, including interest rate cuts. However, most of the capital flowed into the real estate and capital markets, with very little actually invested in industry.
Japan's stock market experienced a super bull run.
After the 1987 stock market crash, U.S. Treasury Secretary James Baker demanded that Japan continue to cut interest rates to attract capital back to the United States. In reality, even with a significant appreciation of the dollar, the trade deficit between the U.S. and Japan remained unresolved, as a large amount of high-quality, low-cost Japanese goods still flooded the U.S. market. This provided the best justification and pretext for currency devaluation.
Japan had no choice but to yield to this pressure and cut interest rates again, leading to a flood of liquidity. In simple terms, there was simply too much money circulating in the market!
Due to the appreciation of the yen, import and export businesses were hit hard. To offset the losses from the decline in exports caused by the yen's appreciation, Japanese companies borrowed at low interest rates from banks and invested in high-yield stock and real estate markets, contributing to the unprecedented prosperity of Japan's stock market.
In 1986, the Nikkei index was at 13,000 points, but by September 1987, it had risen to 26,000 points, doubling in value. This meant that the net worth of every investor in the stock market had at least doubled. The rise continued, and by 1989, the Nikkei index reached its historical peak of 38,915 points.
In this environment, Japanese people with large amounts of capital began to acquire assets overseas in a frenzy. They seemed to disregard prices, brandishing checkbooks to acquire whatever they wanted.
There was even a story circulating that an American building was being sold to the Japanese. The Americans quoted $400 million, and the Japanese agreed. Just a few days later, the Japanese brought a new contract with an amount of $610 million. The Americans were astonished, and while they were overjoyed, they were also puzzled. When they asked the Japanese, the latter casually explained, "The day before, their boss saw the Guinness World Records, which stated that the highest price ever paid for a building was $600 million. They wanted to break this record."
To break a world record, they were willing to pay an additional $210 million, which clearly demonstrated that the Japanese were not short of money.
By 1989, Japanese purchases of U.S. assets reached a peak. In June of that year, Sony acquired Columbia Pictures, one of the seven major U.S. film companies, for $3.4 billion, causing a significant shock in the United States. Soon after, Mitsubishi Estate purchased the Rockefeller Center, a symbol of the United States, for $1.4 billion.
The Rockefeller Center is a complex of 19 commercial buildings spanning three blocks in Manhattan. It was designated a "National Historic Landmark" by the U.S. government in 1987 and is the largest privately owned building complex in the world, symbolizing modernist architecture and capitalism.
Although it had lost some of its luster to the younger World Trade Center towers, the Rockefeller Center had a long history and was built during the Great Depression, providing over 50,000 jobs in New York. It had a deeper historical significance and meaning compared to the younger World Trade Center.
The acquisition of such a landmark by a Japanese conglomerate was as significant as raising the Japanese flag on Capitol Hill. The entire United States was abuzz with discussion, and some even worried, "When will the Japanese buy the Statue of Liberty?"
Not only were these iconic buildings targeted, but even ordinary real estate was not spared. After all, compared to Japan's property prices, the prices of real estate here were extremely cheap.
It was once calculated that the land value of Tokyo alone could buy the entire United States, illustrating just how high Japan's property prices were at the time.
In fact, in later years, a similar situation occurred not only in Japan but also in the capital of another country. This happened about 20 years later, but the situation was very similar to that of Japan at the time.
The only difference was that the asset bubble in that country's stock market was burst early, leading to a significant reduction in the wealth of most investors.
However, in the real estate market of that country, due to the different land ownership system and the influx of large amounts of capital, the rise in housing prices was no different from Japan's.
Moreover, land had become an important source of fiscal revenue, so even as housing prices continued to rise, the government had to grit its teeth and persist.
This naturally made life difficult for the younger generation.
Without further ado, let's return to Japan in the 1980s.
With the stock market's crazy rise, the entire Japanese archipelago fell into a frenzy. People even believed that there was something unique and beyond economic laws in Japan's stock market, something that would keep it strong and prevent it from ever falling.
The only group that remained clear-headed was probably the officials at the Ministry of Finance who were formulating policies.
In 1986, Nikkei 225 futures began trading on the Singapore Financial Futures Exchange.
The Nikkei 225, also known as the Nikkei Average Stock Price Index, is a stock price index of 225 stocks listed on the Tokyo Stock Exchange, published by the Nikkei. This index has a long history and is a reliable indicator for examining the long-term evolution and recent changes in Japan's stock market.
After Singapore introduced Nikkei futures, Japan and the United States also launched Nikkei futures, but Singapore, being the first market to introduce them, had the largest trading volume and influence.
The reason Zhong Shi did not buy Nikkei futures in Singapore was that futures require constant monitoring, and a slight misstep could lead to a margin call. Although he was not afraid of this risk, it was still more reassuring to invest in Japan's stock market. He invested about 10 billion yen in Japan's stock market, sitting comfortably in a bull market that only went up.
In fact, not everyone was as crazy as Japanese investors and entrepreneurs. In the eyes of American financial elites, Japan's stock market had already exceeded the normal range of a bull market and had formed a significant asset bubble.
In this situation, investment banking elites designed a new financial derivative and began selling it in Japan, which was the stock index option.
Stock index futures and options are two different concepts. The financial innovation leaders from American investment banks combined them to create a new product: stock index options.
In essence, this is still an option, but the underlying asset is a stock index futures contract.
Generally, options have two types: call and put. The final outcome of the bet can be either execution or non-execution. Futures also have two types, resulting in four different varieties.
The leverage of options is usually between 10 to 100 times, depending on the underlying asset, and the leverage of futures is similar. This can result in leverage of up to 100 to 1,000 times.
It cannot be denied that American financial innovation was far ahead of the world.
The financial elites from American investment banks were selling put options on the Nikkei index in Japan. These options allow the holder to buy a put option on the stock index when it falls to a certain level, with major underwriters being firms like Morgan Stanley and Salomon Brothers.
This new financial product was unheard of in Japan. When the large conglomerates first heard about it, they were amazed. They realized it was an excellent risk management tool and began to buy it in large quantities.
How does this product manage risk? Suppose there is 10 billion yen invested in the stock market. The holder can buy a put option on the stock index for 100 million yen (assuming a leverage of 100 times). If the stock index falls below a certain level, the option can be executed, converting into a certain amount of short positions in the stock index futures market, thereby hedging the risk.
Of course, this risk cannot be completely hedged unless the holder has an equal and opposite position, which would eliminate any profit and incur significant transaction costs.
In Japan's stock market, insurance companies are extremely important investors. Unlike other industries, the insurance sector places a high emphasis on risk management, making them the first to embrace this new product.
After all, no one could predict what the future would bring, except for Zhong Shi.
After the global stock market crash of 1987, Zhong Shi took a break for two years, attending school diligently and traveling extensively throughout China in his free time.
Each time he went out alone, and after a while, Zhong Jianjun and Liu Lan became less worried. During these two years, he grew significantly, and at 13, he was already 1.7 meters tall, with a strong build, making him look like a teenager of 17 or 18.
His sister, Zhong Xiaohui, continued to study hard at the county high school, with excellent grades and a good chance of getting into a prestigious university.
One day, Zhong Shi had just returned home, still covered in dust from his travels, when he received a call from Hong Kong. It was Zhong Yi!
Over the past two years, Zhong Yi had been quite successful. Besides excelling academically, he had also become good friends with Liao Xiaohua. They were of similar age and shared the same background, so they had a lot to talk about. When the Hong Kong media discovered that Zhong Yi lived in a multi-million-dollar mansion in Shallow Water Bay, they dubbed him a "young noble."
"What's up, young noble?" Zhong Shi joked over the phone.
"Hong Kong's property prices are plummeting, apparently due to the events in Beijing. Many people are rushing to move to Hong Kong. Should we do something about it?" Zhong Yi chuckled and got straight to the point. (I hope all my readers continue to support me. Your support is my motivation, and I am very grateful!)