What the 1990 Japanese stock market crash can teach us about today’s Chinese crash

A large Asian economy experiences a couple of decades of supercharged growth, overtakes Germany as the world’s biggest exporter, and becomes the world’s second-largest economy, powered by a large manufacturing sector and a large trade surplus (though dogged by accusations of current manipulation). Americans worry they are falling behind, and marvel at the country’s soaring stock market. But then it soars suspiciously high, before crashing into the ground,

Sound familiar? I’m referring, of course, to the great crash of Japan’s Nikkei 225 index over the course of 1990. Looking at that historical episode helps put the ongoing Chinese stock market crash in context.

After reaching a peak of 38,916 points in late 1989, the main Japanese stock market began to plunge. As Vaclav Smil recalls, “The index was below 25,000 by November 1990 (losing nearly 40 percent in 1990); the first dip below 20,000 came in March 1992; the 15,000 level was broken in June 1995; and the first slip below 10,000 came in September 2001.”

This was tied in with a genuinely bad economic situation in Japan, which suffered a “lost decade” of essentially zero economic growth across the 1990s. But suppose you were an American sitting around in 1990 dialing in to CompuServe to check out the latest carnage in the Asian financial markets and worrying about your family and your country. Well ... it turns out that an epic economic collapse in a giant Asian economy isn’t necessarily a huge problem for the United States.

In fact, while Japan was stagnating, the United States had its best decade since the 1960s. Japan started growing again (on a per capita basis) in the 2000s, but the US has never again enjoyed growth as robust as what happened while Japan melted down.

All of which is to say that even if the Chinese stock market crash proves to be a harbinger of profoundly bad news for the Chinese economy, it’s not necessarily going to be a serious problem for the typical American. Total US exports to China, for example, are only 0.7 percent of American GDP, meaning that continued economic growth in China isn’t particularly significant to American businesses.