What a roller-coaster ride the Nikkei 225 has had in the last 40 years!
5 August 2024, 14:15
- David Buik is LBC's Markets Commentator
With the NIKKEI 225 having taken a serious larruping today – down 12.4% at 31458 and down 25.49% since 11th July 2024, I thought it might be helpful to ‘have the drains up’ in terms of its history since the 1980s.
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By any standards this has been a massive correction, caused by a number of issues – firstly the Bank of Japan putting up its official rate by 25 basis points to 0.25% was diametrically opposed to the trend of the MPC and ECB, which have lowered rates and hopefully the FED, which irritated and frustrated investors by sitting on its hands last week, will do so next month, if not before, especially as Non-Farm Payroll data looked weak on Friday as had PMI data.
Secondly, the Yen has been far too strong against the Dollar at Y142.64.
Thirdly, investors in Japan were rattled by the discouraging US economic data with fear that was gathering pace that a recession in the US was a possibility in the not-too-distant future. Goldman Sachs felt there was a 25% chance and JP Morgan a 50% chance.
Thirdly the gain made by the Nikkei 225 in the last 2 years – from May 2022 to 12th July 2024 was 63%. Many believe that was too frothy to digest. Why did this happen?
The Rugby World Cup followed by the Olympics in 2021, just after Covid, provided a decent platform for the Japanese economy to select another gear and it did.
It was also helped by the perception that in decades gone by, the relationship between many of the large companies was too incestuous, in that the number of cross-company investments were quite liberal and consequently unacceptable. Regulation has tightened up significantly.
Despite Japanese families being massive savers, Japan’s debt has got totally out of kilter. The public sector employs far too high a percentage of the work force. Japan's public debt was estimated to be 263% of its gross domestic product (GDP), or about $9.2 trillion in US dollars.
This is higher than any other country's debt-to-GDP ratio. When private and public sector debt are combined, Japan's total debt is over 400% of GDP, with corporate debt alone accounting for more than 115%.
Japan’s Asset Price Bubble, exacerbated by the price of property especially in Tokyo saw the NIKKEI hit 38915 in December 1989. After a shock sell-off it the NIKKEI 225 drifted down to 13200 in October of 1998. The global banking crisis took this index down to 6994 in October 2008.
Then a sharp recovery took place over few years. Subsequently, the Nikkei fell over 17% in 2011, finishing the year at 8,455.35, its lowest year-end closing value in nearly thirty years, when the index finished at 8,016.70 in 1982. Between 2013 and 2017 the Bank of Japan held 75% of the ETFs in the NIKKEI 225 and astoundingly it was a top 10 shareholder in 90% of the constituent stocks.
This history expresses astonishing volatility as well as extraordinary official intervention. Who know what the next few weeks will offer. One thing is for sure. Global debt is too high especially Japan’s ratio to GDP and the FED needs to cut rates sooner rather than later
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