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Who saved the Japanese stock market?

On September 28, the closing point of the Nikkei 500 index surpassed the historical high in December 1989. This means that at least one index of the Japanese stock market has recovered from the “lost three decades”..

Performance Comparison of Nikkei 500 and Nikkei 225 from 1990 to 2020

Since 2020, the Nikkei 500 has risen by 7.7%, outperforming the Nikkei 225 by 8%. Nikkei 500 index has 275 more constituent stocks than Nikkei 225, including companies such as Nintendo, the developer of the game console Switch that benefited from the epidemic. At present, the Nikkei 225 index has gained 228% from its 2008 low.

The lost 30 years

On September 22, 1985, the United States, Germany, France, Britain, and Japan held a meeting at the Plaza Hotel in New York. The finance ministers of the five countries agreed to the devaluation of the U.S. dollar and jointly signed the so-called "Plaza Agreement." The sharp appreciation of the yen has attracted a large influx of overseas capital into Japan. [1]

In 1986, the Japanese stock market entered a bull market. The Bank of Japan didn’t try to reduce market risks. Instead, in order to maintain the stability of the yen exchange rate, the Bank of Japan cut interest rates 5 times within a year! [2] On December 29, 1989, the Nikkei 225 index saw its highest point in history - 38957.44 points. At this time, the overall price-earnings ratio of the Japanese stock market is as high as 70.6 times, which is even more outrageous than the Shanghai Composite Index (55 times) in 2007. [1]

As international capital began to withdraw, Japan's bubble burst. The stock market, bonds, exchange rate, and real estate all plummeted in just one year. The Nikkei 225 index fell for 18 years. When it bottomed out at 6,994 points in October 2008, the Nikkei index has fallen by 80% from the highest point in history, and the overall price-earnings ratio was less than 10 times.

Property market went burst, Residents’ wealth was looted, consumption was sluggish, and the economy began to slump. During the 25 years from 1994 to 2019, Japan's GDP in US dollars only increased by less than 4%, while the United States and China in the same period increased by 198% and 2453% respectively! [3]

Trends of GDP in China, the United States and Japan

In 2020, due to the COVID-19 pandemic and the cancellation of the highly anticipated Tokyo Olympics, the Japanese government predicts that GDP will fall by approximately 4.5%. [4] It is still unknown when Japan's economy will truly recover.

Who saved the Japanese stock market?

In the long run, the trend of the stock market is determined by both corporate earnings and monetary policy. If the economy has trouble, it is probable that there are changes in monetary policy.

In December 2012, Abe became the prime minister of Japan for the second time. Under the guidance of Abenomics, Japan began a period of indefinite, ultra-easing policies. [5] The Bank of Japan set the benchmark interest rate to -0.1% for the first time in 2016. Japan's 10-year government bond yields have maintained near zero interest rates for the past four years.

Trend of Japans ten-year government bond yield from 2012

In addition to lowering interest rates, the Bank of Japan directly purchase ETFs. Until today, the Bank of Japan is still the only central bank in major economies that directly purchases equity assets on a large scale. [6]

In 2013, the index ETF purchase scale was set to 1 trillion yen per year. In the second year, it was greatly increased to 3 trillion per year. In 2016, in response to the risk of Brexit, the Bank of Japan raised the upper limit of purchase scale to 6 trillion per year. In March of this year, to support the economy, the Bank of Japan doubled again its ETF purchase target to 12 trillion yen per year! [1]

The Bank of Japan keeps buying ETFs and already was the top 10 shareholders of half of the listed companies in Japan as early as 2019. Now, the central bank holds more than 30 trillion yen in stock ETFs. At the current rate of buying ETFs, the Bank of Japan will surpass the Japanese pension fund and become the largest shareholder of the Japanese stock market before the end of 2020. [1]

The long-term low interest rate environment, combined with the Bank of Japan's continuous purchase of assets, has finally brought the Japanese stock market back to the heights of 30 years ago.

How is the future?

At present, the overall dynamic P/E ratio of Nikkei 225 has reached 37.7 times, a 10-year high, while the median in the past ten years is about 20 times. [1] Even if calculated according to the total profit in 2019, the 24 times P/E ratio is still at a high valuation. In fact, there is still a big uncertainty about how long it will take for the Japanese economy to recover.

In the past 10 years, the overall earnings growth of Japanese companies has been relatively small, and the rise of the index is mainly driven by changes in valuation. So the higher the index rise, the greater the risk exposure. However, the Bank of Japan's steady stream of index ETF purchases constitutes the biggest support for the Japanese stock market. Theoretically, as long as the central bank invests more money in ETF purchases than investors pulling out, the Japanese stock market can continue to rise.It is still an open question whether there will be a cap on the central bank's future holdings and how the large-scale purchases of ETFs will affect the market.

Buffett, who seldomly buys foreign companies, has made a big purchase of Japan's top five trading companies in the past 12 months. Buffett now owns more than 5% of each of the five firms, spending more than $6 billion, and is not ruling out increasing his stake to 9.9% in the future. Japan's major trading firms have a century-long history, but in recent decades they have transformed themselves into conglomerates and are now more like investment companies. In addition to their main businesses in energy, metals, and raw materials, the five major trading houses have also diversified into the textile and machinery sectors. [8] Buffett did not talk about his reasons for the purchase. Thanh Ha Pham, an analyst at Jefferies, said that Buffett may have calculated intrinsic value and concluded that all five companies were significantly undervalued. [9]

Nikkei 225

The Nikkei 225 index is compiled by the Nihon Keizai Shimbun and has a history dating back to 1950. The Nikkei 225 includes the 225 most representative stocks listed on the Tokyo Stock Exchange, accounting for approximately 60% of Japan's stock market capitalization, and is the most widely known index in Japan. [7]

Investors should note that the Nikkei 225 Index is compiled on a price-weighted basis, similar to the U.S. Dow Jones Index. A price-weighted index averages the market prices of all constituent stocks regardless of market capitalization. This method of compilation is easy to calculate, but it is susceptible to the influence of high-priced stocks and does not reflect the objective impact of different market capitalization companies on the market.




Market Cap(T JPY)










Electric Machinery




Electric Machinery








Precision Instruments







M3, INC.












Top 10companies in Nikkei 225 Index on September 30th

The Nikkei 225 has 225 constituents compared to 30 for the Dow Jones. The Nikkei 225's top 10 weighted stocks vary widely from period to period, influenced by stock price changes due to stock splits and earnings changes. As can be seen from the above table, the FAST RETAILING accounted for more than 10% of the index weight, but its market capitalization does not stand out. World-famous companies such as Toyota, Sony and Mitsubishi, whose market capitalization exceeds that of most of the companies in the table above , are not among the top 10.

CN First Futures Clients can trade Nikkei 225 Index futures on SGX in Singapore, CME in the U.S. and JPX in Japan.


[1] 墨羽枫香,格隆汇《重回30年巅峰!谁拯救了日本股市?》


[2] 央视新闻《任期最长的首相黯然谢幕 日本能否追回“失去的三十年”》


[3] The World Bank, Gross Domestic Product


[4] 日经中文网《日本政府预测:2020年度GDP增速-4.5%


[5] 边泉水,国金证券《日本货币政策二十年:“异次元”宽松之路》


[6] 周艾琳,第一财经《全球也就这么一家:日本央行入市八年,买成多家上市公司大股东》


[7] Nikkei 225, Nikkei Indexes


[8] 刘忠勇,林奕荣,经济日报,《巴菲特买进日本五大商社股票,持股总值逾60亿美元》


[9] 里奥,FT中文网《巴菲特向日本五大商社投资60亿美元》


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