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Japan's Nikkei 225 index has recently had a major breakthroughโit's reached the peak it last hit way back in 1989. For investors in Japan, this means the end of a long, dry spell lasting over three decades. It sounds like something to celebrate, right? Well, yes and no.
Sure, it's exciting that Japan's stock market is finally picking up, especially considering it has been keeping pace with the U.S. stock market, despite not being as involved in the latest tech trends like artificial intelligence.
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But before we break out the party hats, let's take a closer look. The fact that it's taken this long to get back to where we were in 1989 is actually a sign of just how tough things have been. Imagine having to wait 34 years just to get back to where you startedโit's more like a slow climb out of a deep hole than a cause for celebration.
Back in 1989, Japanese stocks were riding high, but then came a massive crash. The Nikkei index dropped by a staggering 80% over time, a bit like what happened in the U.S. during the Great Depression. It took a whopping 25 years for American stocks to bounce back from that.
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Those headline index numbers everyone talks about? They're not the whole story. The Nikkei, like other popular indexes, doesn't take into account things like dividends and inflation, which can seriously affect how much money investors actually make.
Dividends are especially vital. Over the long run, the compounding effect of reinvesting dividends makes a huge difference to returns. In the past half-century, U.S. stocks turned $100 into $6,200 without dividends (ignoring costs and taxes) while with dividends they would be worth $25,000. The same is true in Japan, where the 2% yield from dividends is now much higher than in the U.S.
An investor who made the dire decision to buy at the top of the bubble and reinvest dividends made back all losses by March 2021. Somehow we forgot to hold a party.
Inflation matters, too. The good news for asset owners in Japan is that a decade and a half of deflation meant stuff got cheaper, so during that supposed โlost decadeโ the value of their assets wasnโt eroded by inflation, as it was elsewhere. The bad news is that returns were way higher everywhere else even after inflation.
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Coming back to Nikkei, it's not the best measure of Japan's stock market anyway. Just like its US counterpart Dow Jones Industrial Average, it is based on how expensive a stock is as opposed to its overall market capitalisation.
This is silly, since the price of a stock is an arbitrary result of how many shares the company chooses to issue. It's like if you judged a basketball team's performance by the number of tall players they had, instead of looking at their overall skillโand just as with the Dow, it leads to some bizarre results.
The largest constituent of the Nikkei is Fast Retailing, owner of the fashion chain Uniqlo, making up almost 11%. $TM (Toyota Motor Corporation-ADR) , the countryโs most-valuable company, makes up 1.4%. Rank stocks by their market value as other important indexes do, and Fast Retailing would be under 2% of the gauge and the seventh-largest component.
So, while it's exciting that the $XDJP.L is back to its 1989 level, it's not the full picture. Even if we look at a different index called the Topix, which is more comprehensive, Japanese stocks still haven't fully recovered.
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And while Japan's economy has had its ups and downs, there are signs of improvement. Banks are getting back on their feet, companies are learning from past mistakes, and consumers are starting to feel more optimistic. So, maybe it's not time for a wild celebration just yet, but it's definitely a step in the right direction.... Show More
