After a 20-year [1982 to 2002] journey, Nikkei 250 index was back to the starting point.
And it hasn’t yet reached the previous high 34 years ago (1989 level) as of 2023.
What happened?
A lot of things to unpack.
GDP
I am looking at GDP (in local currency terms) first – equity market should be a ratio of GDP.
Japan already enjoyed a robust growth (1972-1982) with GDP almost tripped in 10 years (!), which translates to 11.4% cagr.
The miracle continued for another decade.
1991 GDP also grew 6.4% yoy vs. 1990; however, GDP growth dropped to 2.5% in 1992 and to 0.0% in 1993.
During the second phase of which ended on 1991, Japan’s GDP still compounded at ~6% cagr (1981 – 1991), although not as high as the last decade. And Nikkei index climbed during this period as well.
What’s wrong then?
The “10-year GDP cagr” would drop continuously from 1991’s 6% to below 1% in 2002.
Remember, Nikkei index peaked in 1989 (red mark).
While in 1990 and 1991 Japan’s GDP still enjoyed 7.6% and 6.4% growth, 1992 would be 2.5% and 1993 would be 0%.
It was the mid-term / 5-year projection that’s worrisome. And indeed, the 10-year GDP cagr would start to decay, with no reversal in sight.
Nikkei index bottomed in 2003, when the dot-com bubble also came to an end. S&P 500 dropped ~24% in 2002 (after double-digit drop in 2000 and 2001), but grew 26% in 2003.
The index bottomed as the 10-year GDP growth would be bottoming and things won’t go much worse from here.
Nikkei index is now (2023) ~4x the 2003 bottom though, what happened?
Nikkei index climbed 4 consecutive years (2003 – 2006), before the Global Financial Crisis hit.
Japan’s 10-year GDP cagr would still be ~0% in 2007, but from 2004 to 2007 it experienced a 4 consecutive year of GDP growth.
Things would look better in 2012, when Japan GDP would be re-entering a growth mode. 10-year GDP cagr would bottom in 2011 at -0.7% and recovered to 0.1% in 2015 and to 1.2% in 2019 before covid.
To make it a full graph.
As mentioned above, although 10-year GDP cagr still has pressure from 2003 onward, actually yearly GDP growth is positive from 2004-2007. Therefore the 3-5 year outlook would actually be reversing in 2003.
