DARTMOUTH, UK—Questions about the financial implications of radical new technologies—AI, space travel, and their associated infrastructures, to pick a few—have led to a veritable analogy-fest. Is this a replay of the railway boom of the 1870s, which came to grief in the 1880s? A repeat of the electrification boom of the 1890s, which unfolded smoothly but took three decades to play out?
No analogy is perfect. Nor should we seek one: the most valuable insights often derive from how precedents differ from the case being considered as much as from their similarities.
In that spirit, an especially apposite case is Nippon Telegraph and Telephone’s February 1987 initial public offering. In terms of its financial footprint, NTT’s IPO put SpaceX’s in the shade, amounting to 7–10% of then-existing Japanese stock-market capitalization (depending on what’s counted), compared to SpaceX’s 2.5% of current US stock-market capitalization. Take that, Elon Musk! Even if one adds the forthcoming OpenAI and Anthropic IPOs, the footprint of NTT’s late-1980s offering remains overwhelmingly large.
Yet Japanese stock markets digested NTT’s IPO with nary a hiccup. Not only were initial price expectations met, but NTT shares rose strongly from there, doubling in the first two months of trading.
One reason for investors’ enthusiasm was that NTT was the dominant company in the Japanese telecom sector. It symbolized the country’s transformation from a manufacturing powerhouse to an information society. It effectively monopolized telecom networks, data transmission, and digital connectivity. It was seen not just as a source of monopoly rents but as a bet on information technology generally. Even if fax machines and dial-up modems fell out of fashion, the company was well positioned to capitalize on what came next.
There was also pressure for institutional investors to load up on NTT shares. Just as managers of index funds today are compelled to buy SpaceX when the company is added to indices they are mandated to track, Japanese banks and insurance companies were obliged to buy NTT shares or be seen as taking a bet against Japan’s information society. And, given the weight of NTT in the Nikkei, that meant betting against the Japanese stock market and the Japanese economy generally. In an environment where managers were punished for conspicuous losses and only mildly rewarded for successful bets, contrarian positions were taken at personal and institutional risk.
NTT shares benefited from a supportive macroeconomic and financial environment as well. Economic growth had slowed from the miracle period in the third quarter of the 20th century, but Japan was still regarded as a formidable competitor. It was less than a decade since the Harvard sociologist Ezra Vogel’s bestseller Japan as Number One, a title not yet regarded with irony. The Nikkei Stock Average rose by 14% in 1985 and an astounding 43% in 1986. The Bank of Japan halved its policy rate from 5% in early 1984 to just 2.5% in early 1987, leading investors to seek alternatives to Japanese government bonds.
We now know that investor enthusiasm was overwrought. The Bank of Japan began raising interest rates in May 1989, in an effort to lean against financial excesses. The Nikkei peaked in December, and it was all downhill from there. Notably, however, NTT shares had already peaked in April 1987. By April 1988 they were down by 25%, and by April 1989 they had fallen by another 37%. In the 1990s, NTT shares hovered at around one-third to one-half of their bubble-era valuation.
The irony was that NTT performed well over this period. In the 1990s, it continued to expand into new forms of telecommunications and data services. But its business model was more capital-intensive than investors, envisaging disembodied digital technologies, had assumed.
Over time, moreover, the company faced new competition. Mobile telephony lowered entry barriers by eliminating the need for telecom firms to own the entire “digital stack” (physical as well as technological infrastructure). Thus, positive productivity performance did not automatically deliver super-profitability. And NTT shares had been priced for perfection.
There are several notable implications for today. First, a favorable macroeconomic and financial backdrop can support investor sentiment for a time, but that context can change abruptly—along with the sentiment. This observation is timely today, given how the Fed is poised to raise interest rates.
Second, institutional factors, such as the need for fund managers to track equity indexes, can reinforce market momentum. But momentum runs in both directions: it can perpetuate share-price increases but also reinforce share-price declines once the latter are underway.
Third, technological and market dominance is not forever. As technology continues to evolve, a first mover can experience competition that squeezes profits and investor returns in a manner incompatible with rich share valuations.
Again, no analogy is perfect. But this does not weaken their value as warning signs.
Copyright: Project Syndicate, 2026.
