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Meanwhile, Thirty-Five Years Later

The Nikkei 225 just hit a new high! It has broken through 40,000 for the first time in history!
Dr. Bryan Taylor, Chief Economist, Global Financial Data
Global Financial Data, March 4, 2024

With many stock market indices in the United States hitting a new high, this shouldn’t seem unusual, but it took the Nikkei 225 thirty-five years achieve a new high and hit 40,000. The Nikkei 225 is an average, calculated similarly to the Dow Jones Industrial Average.  Back on December 29, 1989, the Nikkei 225 registered an all-time high of 38,915.9.  The Nikkei ended a fantastic run, rising over 16% per annum between May 1949 when the Tokyo Stock Exchange reopened and December 1989. However, 38,915 was the peak for the next thirty-five years. The Average plunged after December 1989, declining to 7162.9 by October 27, 2008, an 81% decline.  Since 2011, the Average has risen almost 14% per annum to reach a new high in 2024. The path of the Japanese stock market between 1914 and 2024 is illustrated in Figure 1.



Figure 1.  Japan Nikkei 225 (with GFD Extension), 1914 to 2024


              The Nikkei 225 Average isn’t the only stock market index that tracks the performance of Japanese stocks.  The TOPIX (Tokyo Price Index) is a capitalization-weighted index that tracks all stocks traded on the Tokyo Stock Exchange.  The TOPIX also hit an all-time high on December 29, 1989, at 2881.37, but it has yet to hit 2881 again.  The TOPIX recently closed at 2706, about six percent off its all-time high.  The TOPIX will probably hit a new all-time high later this year.

You can compare the 1989 Japanese stock market bubble to the 1929 bubble in the United States.  The Dow Jones Industrial Average peaked at 377.60 on September 7, 1929.  It then plunged over 86%, hitting a low of 41.22 on July 8, 1932.  The Dow Jones Industrials didn’t return to 377 until November 1954, twenty-five years later.  It has stayed above that level ever since.

When the Nikkei 225 hit 38,915 in 1989, the Japanese stock market was the largest in the world. However, within a year, the Japanese stock market had declined and was smaller than the US stock market.  Today, the Japanese stock market at $6 trillion is about 12% of the size of the US stock market.  It is still the second largest stock market in the world after the United States, but it will never again exceed the size of the US stock market.  

Currently, the Japanese stock market is equal to about 150% of Japanese GDP, the same level it reached in 1989 before the bubble burst. The Japanese market’s capitalization as a share of GDP might raise concerns, but the US stock market is over 170% of US GDP. In 1989, when the Japanese stock market hit 154% of GDP, the US stock market was only 62% of GDP. Interest rates remain low in Japan, and lower interest rates can support a higher market capitalization in the stock market.  

One factor that has driven money to the stock market in Japan has been the low interest rates that the Bank of Japan has imposed on the economy. The Japanese 10-year bond yielded 5.7% in 1989, but only 0.7% today.  The yield on the 10-year bond has been below 1% since 2012 and was negative in 2016 and 2019. Treasury bill yields have been below 1% since 1995 and negative since 2016.  Since 2008, the dividend yield on stocks has been greater than the yield on the 10-year government bond.  Money has flowed into stocks and out of bonds as a result.

The dividend yield has been rising since 1989 when the yield hit 0.33%. The current dividend yield in Japan is a little over 2% which is greater than it is in the United States. The Price/Earnings (P/E) Ratio for Japanese stocks is reasonable today.  In 1989, the P/E Ratio was around 70, having risen from around 20 in 1981. The P/E Ratio peaked at around 100 in 1996 but declined to under 20 in 2007. The P/E ratio has traded within a range of 12 to 20 during the past 17 years and is currently around 16.  The dividend yield and P/E ratio are not out of line with historical data.  

If you compare Japan with the United States, Japan’s dividend yield is higher, its P/E Ratio is lower, its market cap as a share of GDP is lower, and interest rates are lower. In 1989, the opposite was true. The Japanese stock market is not in a bubble the way it was in 1989.  There are few expectations that the Japanese stock market will collapse from this new high.

Is the Nikkei 225 headed for 50,000?  Maybe. Although the Japanese stock market has grown at 14% per annum since 2011, and it would only take two years to reach 50,000 at a 14% growth rate, both GDP growth and inflation have been anemic. GDP and inflation have grown at less than 1% since 2000 and there is no anticipation that growth will pick up soon.  It seems unlikely that the stock market will continue to grow at such a rapid pace in the near future, but at least the Japanese stock market has returned to its old all-time high after thirty-five years and broken through an important benchmark.