An economic “ice age” that froze one of the world’s strongest economies for 30 years and locked entire generations out of work seemingly came out of nowhere.
It was the late 1980s — a decade marked by rapid globalisation and corporate excess around the world — and Japan appeared unstoppable.
Known as a powerhouse in technology and innovation, the nation of 122 million not only had a stock market that was booming, but its banks had become some of the largest in the world and its property market was running red hot.
It was this last feature of the economy, housing, that was beginning to really take a life of its own.
At the height of the frenzy, Japan’s total property market was estimated to be worth four times the value of the entire United States. The grounds of the Imperial Palace in Tokyo were supposedly worth more than all the real estate in California.
Then one day, as the decade came to an end, the bubble burst in spectacular fashion.
Families who brought a modest suburban home in 1989 for the equivalent of $1.5 million watched its value collapse by 80 per cent.
Trapped in massive negative equity, they spent the next three decades paying off exorbitant mortgages for properties that were worth far less than what they had paid for them.
Young people were smashed perhaps more than anyone as the stock market crashed by 60 per cent in just three years.
Millions of young Japanese university graduates stepped out of high-flying degrees and straight into a ghost town.
They were forced into low-paid, temporary “freeter” jobs — part-time, temporary, or freelance positions in shops and cafes — because they were unable to secure permanent corporate work.
It meant that millions couldn’t afford to buy homes, marry, or have children. Japan’s birthrate plummeted, and “parasite singles” — adults in their 30s and 40s still living in their childhood bedrooms — became the norm.
Wages didn’t just stall, they collapsed. Everyday citizens stopped spending, terrified of taking financial risks. Cash was stashed in home safes rather than invested, and entire high streets were replaced by discount shops as the economy ground to a halt.
It took a staggering 34 years for Japan to dig itself out of the economic disaster now known as the “lost decades”. In 2024, the nation’s stock market finally surpassed its 1989 peak and even today it is still trying to bounce back from the generational slump.
A chilling warning for Australia
Now, a leading investment expert has warned Australia is laying the groundwork to repeat Japan’s exact mistakes — a process known by economists as “Japanification”.
It’s a term that describes economies where trapped capital, ageing incumbents and weak productivity growth reinforce each other over time.
Chris Brycki, chief executive and founder of investment platform Stockspot, says Australia is showing dangerous parallels to the pre-crash Japanese economy of the late 1980s.
“I think there are a lot of similarities to Japan in the late 80s and early 90s, where they had obviously come off the back of a big property boom, but then saw a big drop in productivity,” Mr Brycki told news.com.au. “Money got trapped in legacy assets.”
While Japan’s pain is now in the history books, Mr Brycki said Australia’s current trajectory could trigger a similar multi-decade period of underperformance if capital remains locked away in unproductive corners of the market.
“In Japan, what it led to was just a long period of stagnation, and the country went backwards compared to the rest of the world for 20 or 30 years,” he said.
“The warning in all of this is that if you incentivise everyone to just leave money in old, grandfathered property assets and shares that pay dividends over capital growth, money is not going to flow into those new areas of the economy that are going to create jobs.”
The tax trap keeping Australia stuck in the past
At the heart of the issue, according to Mr Brycki, is a tax framework that penalises innovation while protecting legacy wealth.
Under current rules, existing investors holding negatively geared investment properties or primary residences face almost no incentive to sell because their assets are protected under older tax regimes.
At the same time, the tax treatment of shares heavily favours big dividend payers over high-growth companies, while Treasury rules restrict investors from properly writing off real losses.
“If you already own a negatively geared investment property or you already own a primary residence, there’s very little incentive to sell it because they’re protected under the old regime,” Mr Brycki explained.
“So there are just a few dynamics of the tax changes that lead to the wrong impacts in the economy, which is money getting stuck in old legacy assets not getting recycled into new assets.”
Instead of funding cutting-edge biotechs, robotics, or artificial intelligence start-ups, Australian capital is funnelled straight back into established corporate giants.
“If it continues this way, we might see a continuation of old legacy businesses, like the BHPs, Telstras, and Woolworths, money coming in at the expense of new innovative businesses and start-ups,” he warned. “That’s going to make us less competitive globally.”
The structural disincentives are so severe that Australia risks driving its best and brightest entrepreneurs offshore to countries like Singapore, New Zealand, or the United States.
Mr Brycki pointed out that while global tech giants like Amazon and NVIDIA drove decades of economic prosperity in the US, Australia’s tax setup makes it almost impossible for similar companies to make a splash locally.
“It is such a disincentive, and the government recognises this,” Mr Brycki said. “The tax essentially doubles if you’re starting a business, and we become completely uncompetitive globally.”
Adding to the irony, foreign investors often face far lower tax hurdles when investing in Australia than local citizens do.
“If you’re a Singaporean investing in Australia it’s fine, but for an Aussie, there’s no reason to go and buy some speculative mining shares or technology shares when your effective tax rate could be over 80 per cent in a pretty normal sort of portfolio where you’ve got some winners and some losers,” he said.
“It’s like a double disincentive. If you’re a founder, you’re more likely to set up in another country… and then for any investors in the country, you’re unlikely to invest in them because the tax is worse.”
‘It is already happening’
This economic shift isn’t just a theoretical threat — the data shows Australian investors are already changing their behaviour in real-time.
Stockspot’s internal data reveals a dramatic movement of capital away from growth-oriented investments and towards defensive, income-generating vehicles like dividend ETFs.
“We’re seeing our clients put more money just into the income-styled portfolios — the ones that aren’t really geared for capital growth that are paying more income,” Mr Brycki said.
“Last month we saw five times as much growth in money coming into that sort of style rather than the traditional growth-type portfolio. So it’s already happening.”
Because exchange-traded funds (ETFs) pool investments together, they offer tax-netting advantages that individual stock picking or small-cap fund managers simply cannot match.
But because most ETF dollars flow directly into major indices like the ASX 200 or ASX 300, the money inevitably ends up back in Australia’s largest banks and miners rather than speculative, job-creating start-ups.
RBA’s warning
Mr Brycki has warned of the “Japanification” of Australia for several weeks. However, he said the warning became starker this week as the RBA acknowledged the growing distortion in investments.
This week, internal RBA documents analysing Labor’s tax changes were revealed in response to a freedom of information request.
It said the capital gains tax shift — from a 50 per cent discount model to a cost base indexation, paired with a 30 per cent minimum tax on net capital gains — could deter investment in high-growth companies, including start-ups, and encourage investment in lower-growth, higher dividend-paying firms.
“By making investment less attractive for some investors, these changes have the potential to increase the cost of capital for Australian businesses,” RBA analysts noted.
“The aggregate allocation of capital may tilt more towards sectors with more mature assets that generate steady income (e.g. utilities), and away from firms where capital gains comprise a large share of expected returns (e.g. start-ups).”
Mr Brycki said the RBA analysis confirms what he has been warning about for several weeks.
“The RBA is now basically confirming that the tax system incentivises money to chase dividends and stable businesses rather than go for growth,” Mr Brycki said.
Mr Brycki isn’t the only one raising concerns.
University of NSW economics professor Richard Holden told the AFR that a higher cost of capital made some marginal investment opportunities not financially worthwhile to pursue.
“Conceptually, raising the cost of capital means less investment,” Holden said.
“In the midst of a productivity crisis where we’ve had more than a decade of extremely lacklustre business investment, this makes business investment more expensive.”
The government’s defence: ‘Good economic reasons’
Treasurer Jim Chalmers has repeatedly defended the controversial changes to the capital gains tax, arguing they are designed to stop a system that currently rewards tax avoidance over genuine economic growth.
Speaking at an investment forum in Sydney, Dr Chalmers said the reforms were fundamentally about reducing market distortions.
“We recognise that a distorted tax system means distorted investment decisions,” he said. “We want to encourage investment for good economic reasons and not necessarily just for good tax reasons”.
The Treasurer has also pushed back against complaints from the business sector that the tax changes should only apply to real estate and not to shares, arguing that carving out exemptions would only create new loopholes.
“Making changes to the CGT settings for one type of asset and not another type of asset, we think would just introduce new distortions, and ultimately that’s bad for investors and for the economy,” he said.
For the government, the changes are also a crucial lever to fix the nation’s housing crisis and level the playing field for younger generations who have been locked out of the property market.
Mr Brycki said the data was not yet in to reveal the impact of the changes, but that the government was standing firm as business and investment experts raise concerns.
“It’s hard for them to backtrack on such a big change, so they’re digging their heels in and continuing to push against any data that doesn’t support what they’re saying,” he said. “Eventually, the data is going to win over the narrative.”