Can anyone provide a good explanation as to why N225, or the Japanese stock market, has not been able to surpass its high of 38957 recorded in Dec 1989. Not only that, it has recently broken new low and is now trading at record low levels around 8500. After 19 years of hardwork and corporate earnings, how can the N225 be at its low? If it can happen to N225, why not the S&P 500? I mean Japan is not a Zimbabwean country. It is the second largest economy and it has generated so many powerful household brandnames. How can anyone say that stocks return about 10% over the long term? I really cannot comprehend. Please provide insights to me.
How can Nikkei 225 not recover after so many years?
- Thread starter tyrant
- Start date
Good question!
The answer comes down to nominal value.
The Japanese flooded their Market with ridiculous levels of Yen, back in the 80's.
Think Zimbabwea-style inflation.
Real Estate prices appreciated 10 to 100 TIMES their original pre-bubble value.
That money bubble inflated the Nikkei some 300% to 40K.
That 40K reflected their depreciated YEN, in 1990 terms. Thats it.
In no way was it an accurate reflection of their inflation-adjusted growth!!
It was just money printing run amok, expressed through Stock Value.
So when the Bubble Collapsed, and all that money dried up, and the Nikkei returned to fair value relative to their hugely deflated currency - around 8K.
It could happen here.
The answer comes down to nominal value.
The Japanese flooded their Market with ridiculous levels of Yen, back in the 80's.
Think Zimbabwea-style inflation.
Real Estate prices appreciated 10 to 100 TIMES their original pre-bubble value.
That money bubble inflated the Nikkei some 300% to 40K.
That 40K reflected their depreciated YEN, in 1990 terms. Thats it.
In no way was it an accurate reflection of their inflation-adjusted growth!!
It was just money printing run amok, expressed through Stock Value.
So when the Bubble Collapsed, and all that money dried up, and the Nikkei returned to fair value relative to their hugely deflated currency - around 8K.
It could happen here.
It doesn't quite make sense because when the bubble burst in 1989, Nikkei had corrected sharply and the currency market would have adjusted itself so that after maybe 2 or 3 years of correction, the Nikkei should be in equilibrium again, and their share market, which record growth in nominal terms, should go higher and higher from there, factoring in all the productivity accumulated over 19 years.
How can one attribute the failure of N225 registering growth to one single cause of over supply of yen? If that is the case, why has that only happen to N225? Most global equity markets have consistent growth.
Think 2020 to 2030 especially if its inflation adjusted. Hell, given whats happening now it might be 2040+. Your government looks like its going to screw the populace with inflation to unscrew your debt crisis and save their buddies.
Three bubbles popped at once: housing, debt, stocks. Actually 4 with commodities. And the debt levels well exceeded those that drove the 1929 crash so we're probably fucked.
If inflation goes up, SP500 should also go, though in nominal terms. This is what the Japanese did. They reduce rates to zero. BUT there is no inflation. And the N225 did no go up. So, who's to say that we HAVE to go up, that there must be severe inflation, since we pump in so much liquidity?
Back to the question why N225 fail to go up. This is a serious question because the whole retirement plans and "belief" system of the Americans is hinged on this "long term 10% growth in stocks". What if SP500 stay below 1500 for 20 years?
Why bother investing in stocks if you know it's not going up for 20 years? And I throw this question to people familiar with the N225. Were there value stocks with low p/e and high yields in the Jap stocks? How would one fare if they bought these value stocks 10 or 20 years ago?
The recent lows are certainly due to the ongoing global economic crash, which is bearish for Japan's export-oriented economy.
As to the N225, it really should not be that surprising. Just look at the performance of the Nasdaq composite since 1999: we were at 5000 and now we're at 1500. Japan had tremendous speculative bubbles in shares AND real estate (like the dotcom crash and subprime crisis combined into one), followed by deflation and a decade of poor GDP growth. The PE ratio of the N225 is still around 10 (AFAIK), about the same as for the S&P. Going forward, Japan has a falling population, and in an absolute sense (though not per capita) its economic growth will remain anemic for the foreseeable future.
At the end of the day, the market price of shares is determined entirely by the psychology of market participants. We can use PE ratios as a guide, but it's always based on past market conditions, and the psychology of previous generations of investors. What the market considers to be a fair price for stocks can easily change, for any reason or none at all.
The prospect that we could see this kind of pattern in the Dow or S&P is IMO quite real, and very scary. For 25 years the finance industry has been selling people on the idea that the market always goes up. Millions and millions of people have seen their retirement savings evaporate, and plenty of them have been buying into the market all the way down - just as the "professionals" have advised them to do. To add insult to injury, we're coming up on the day when the government programs designed to supplement 401(k) savings - Medicare and SS - are going to be facing cuts.
As to the N225, it really should not be that surprising. Just look at the performance of the Nasdaq composite since 1999: we were at 5000 and now we're at 1500. Japan had tremendous speculative bubbles in shares AND real estate (like the dotcom crash and subprime crisis combined into one), followed by deflation and a decade of poor GDP growth. The PE ratio of the N225 is still around 10 (AFAIK), about the same as for the S&P. Going forward, Japan has a falling population, and in an absolute sense (though not per capita) its economic growth will remain anemic for the foreseeable future.
At the end of the day, the market price of shares is determined entirely by the psychology of market participants. We can use PE ratios as a guide, but it's always based on past market conditions, and the psychology of previous generations of investors. What the market considers to be a fair price for stocks can easily change, for any reason or none at all.
The prospect that we could see this kind of pattern in the Dow or S&P is IMO quite real, and very scary. For 25 years the finance industry has been selling people on the idea that the market always goes up. Millions and millions of people have seen their retirement savings evaporate, and plenty of them have been buying into the market all the way down - just as the "professionals" have advised them to do. To add insult to injury, we're coming up on the day when the government programs designed to supplement 401(k) savings - Medicare and SS - are going to be facing cuts.
Answer by example
Industrial bank of Japan at the bubble peakâ¦. P/E ratio 100
So an âintelligent investorâ was supposed to buy something and wait 100 years to take his money back?
Logical assumptions how many years it will take for the index to recover â¦. An arbitrary number for inflation say 2% and an arbitrary number for growth say also 2% (total 4%). The E of the market will need 40 â 50 years under above assumptions to catch up with P so P/E will be meaningful again for P=30000.
Industrial bank of Japan at the bubble peakâ¦. P/E ratio 100
So an âintelligent investorâ was supposed to buy something and wait 100 years to take his money back?
Logical assumptions how many years it will take for the index to recover â¦. An arbitrary number for inflation say 2% and an arbitrary number for growth say also 2% (total 4%). The E of the market will need 40 â 50 years under above assumptions to catch up with P so P/E will be meaningful again for P=30000.