Is Japan Reliving Its 1990 Nightmare?

Japan has just experienced something this week that echoes what happened in 1990.

Japanese stocks suffered a sharp sell-off, falling more than 20% from their peak.

Under normal circumstances, a decline of this magnitude would signal serious trouble.

Yet there is no obvious crisis.

The economy remains solid, and the stock market is still up year-to-date.

So how can a country’s stock market plunge so dramatically when nothing appears to have gone fundamentally wrong?

The answer lies in what Japan went through 36 years ago.

In 1990, Japan had the world’s most valuable stock market. Its spectacular rise had been fueled by cheap money supplied by the central bank.

Then the bubble burst.

It took more than three decades for the stock market to recover its previous highs.

Japan knows better than most what happens when a financial bubble finally collapses.

Now, a similar scenario is unfolding again. But this time, the bubble is not inside Japan. It is in artificial intelligence.

AI has been one of the main engines behind global market gains in recent years.

Companies have poured enormous sums into investments today, betting that these projects will generate substantial returns in the future.

There is one major problem: a significant portion of that investment has been financed with debt.

That is where the vulnerability begins.

In 1990, the central bank supplied the cheap money. Today, credit has taken its place.

A rally built on borrowing cannot withstand a sudden collapse in expectations.

And this week, that moment arrived.

Democrats who won the US election signaled that they favor tighter oversight of artificial intelligence.

At the same time, investors began questioning whether these massive expenditures would ever deliver the returns companies had promised.

Even a small dose of doubt was enough, because beneath the optimism lay a mountain of debt.

So why did Japan feel the impact so sharply?

Because Japan was among the countries most heavily exposed to this wave of AI investment.

At the heart of its stock market stands SoftBank.

SoftBank borrows money and channels it into America’s AI industry, investing in OpenAI, data centers and semiconductor technology.

Its commitment to OpenAI alone has reached approximately $65 billion, much of it financed through borrowing.

When the bubble came under pressure, Japan became one of the hardest-hit markets.

This is not the first time SoftBank has experienced something like this.

During the dot-com bubble of 2000, the company came close to losing almost everything. Its founder’s personal fortune fell by approximately $70 billion.

What ultimately helped him recover was an early investment in Alibaba. That relatively small stake eventually grew into an enormous asset.

For years, SoftBank relied on selling portions of that stake and using it as collateral to maintain its financial position.

This time, however, that stake has been exhausted. The old financial safety net is no longer there.

Debt makes a rally look stronger than it really is. When markets turn downward, that same debt can drag everything down with it.

The more heavily indebted an investor is, the harder the fall can be.

In other words, the real vulnerability here is not Japan itself, but the AI bet inflated by borrowing.

Japan has become one of the clearest warnings of what can happen.

In 1986, American economist Hyman Minsky wrote:

“Stability is destabilizing.”

A prolonged period of calm and rising markets encourages people to borrow more and take greater risks.

That is precisely how underlying fragility builds up.

I am following these developments closely. I will keep you informed.

Kaynak: Penguin X | @ThePenguinBTC