Japan Stock Market Analysis: Will Nikkei 225 continue to surge?

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Things are going very well for Nikkei Index 225 (NI225). 

As the largest stock index in Japan, NI225 has climbed from around 27,575 JPY since the start of this year (Jan. 4) to above 30,000 JPY now (Feb. 23). The last time NI225 went above 30,000 JPY was in the year of 1989.

Similar to NASDAQ and S&P 500, the NI225 price plummeted at the end of Mar, 2020. But It made an incredible come-back right after that. The following chart shows the price firstly went down to around 16,000 JPY and then climbed all the way up to 30,000+ JPY now. Some investors, including myself, have made quite a handsome profit thanks to this V-shape recovery.


So what happens now? Will the NI225 continue this trend?

I think the answer is NO. And here are the reasons. 


1. Japan Center Bank is behind the price surge

Unlike the Federal Reserve, Japan Center Bank (Bank of Japan, BOJ) is allowed to buy and sell Japan stocks. And BOJ has been doing this quite actively. From early 2020, BOJ has been buying and holding NI225. This contributed a lot to the price surge. Simply put, the NI225 price does not necessarily reflect people’s confidence in Japan’s economy, but rather “manipulated” by the Bank of Japan.


So will BOJ continue purchasing NI225 and push the price higher? Not likely. BOJ is slowing down on buying NI225. Since Jan 2021, BOJ has only bought 4 times. And the amount bought each time has also decreased from 100 billion JPY to 50.1 billion JPY. (BOJ actually publishes their stock purchasing plan here). BOJ’s change of strategy will surely impact the NI225 price in a very negative way.


2. Flatline GDP

A country’s stock market should be a reflection of people’s confidence of the country’s future growth. This growth is usually measured by Gross domestic product or GDP. So how does Japan’s GDP for recent years look like?


Not good. Japan is ranked 3rd in terms of total amount of GDP in the world. But the country is ranked 159th when it comes to GDP growth rate. 


Japan’s GDP growth rate is negative 3.3% for 2020, 0.7% for 2019, 0.3% for 2018 and 2.2% for 2017. As a comparison, let’s also check what the numbers look like for both China and the United States.

China’s GDP growth rate is 3.6% for 2020, 6.1% for 2019, 6.7% for 2018 and 6.9% for 2017.

The GDP of the United State is negative 2.9% for 2020, 2.2% for 2019, 2.9% for 2018 and 2.4% for 2017. 


If this trend persists, the gaps between Japan and both China and the United States will continue to grow further. And this will definitely cause the investors worldwide to shift their money from Japan to countries with higher growth rates. This means less money will be put into NI225, which influences the NI225 price in a very negative way.


3. Decreasing Population

Population growth rate is a key indicator for a country’s economy status. If a country is to continue to grow and prosper, a growing population and labor force is a necessity. 


So what does Japan’s population growth rate look like? Again not good.


Actually the population growth rate in Japan has been below 0% since 2011. For the past decades, the annual population growth rate in Japan has been stable at negative 0.2%


Again, let’s compare the number with Japan, China and the United States.


China’s annual population growth rate has also been declining for the past decade, from 0.5% in 2011 to 0.4% in 2019. The United States too, has seen a declining population growth rate, from 0.7% in 2011 to 0.5% in 2019.


Note that both China and the U.S. have a positive annual population growth rate except for Japan. This, in the long run, will cause Japan’s market to shrink, which will then influence negatively on the NI225 price.


4. (Empirical) Japan is slow to change

The last point is an empirical reason. I have lived and worked in Japan for 8 years. My take on this country is that Japan is afraid of change. 


My interpretation for the root cause of this is that most Japanese people adopt a strategy of risk aversion. This means most Japanese people will avoid doing things with even a shade of uncertainty.


While this strategy may work well when things are moving upward, it will definitely be an obstacle when the situation is deteriorating and a change is desperately needed.


As a summary, going back to our discussion of the NI225 price movement, despite that fact that the NI225 price has surpassed 30,000 JPY and approaching the historical high recently, I believe this trend will not continue, especially not in the long run.


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