The Success of Japan’s Nikkei Index: Insights and Future Opportunities
The leading and most prestigious index of Japanese stocks is the Nikkei 225 Stock Average, abbreviated as “Nikkei” in Japan. The top 225 blue-chip businesses in Japan that are traded on the Tokyo Stock Exchange make up this price-weighted index.
Canon Incorporated, Sony Corporation, and Toyota Motor Corporation are a few of the most well-known businesses included in the Nikkei index. It is Asia’s oldest stock index. As Japan was being rebuilt and industrialized following the Second World War, the Nikkei was founded. Instead of being ranked by market capitalization, as is typical in most indices, constituent stocks are ordered by the share price. The Japanese yen is used as the unit of measurement. Every September, the Nikkei’s composition is examined, and any necessary adjustments are made in October.
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Why is Nikkei in the news?
On December 29, 1989, the Japanese stock market had its last day of trading. The Nikkei index reached a record high of 38,916. and then finally came tumbling down.
Anyone who invested during the peak, taking the proverbial “stocks go up in the long run” advice to heart, would still be kicking themselves today. Since the stock market hasn’t broken that record in 30 years, even.
This year, the Nikkei has increased by 20%. Although it has reached a 33-year high, it is still below the peak. Simultaneously, Warren Buffett stated he was “proud” of his recent investments in Japanese companies when he paid a visit to the nation in April.
Should investors be turning towards Japan?
First off, while the economies of the US and Europe are in decline, Japan’s economy is expanding quite steadily. On the other hand, the Bank of Japan continues to adhere to its ultra-loose policy to promote growth even as the US raises interest rates. Not to mention that the Japanese Yen has lost ground to the US currency. As a result, this will benefit Japan’s export-dependent businesses leading to a rise in their income.
Perhaps there is something additional that most people are overlooking. We’re discussing corporate governance here! And to comprehend this, we must swiftly travel back in time. People experienced a harsh jolt in 1990 when the asset bubble burst. In the Japanese corporate environment at the time, there was a lot of hanky-panky going on.
In retrospect, one would presume that the Bank of Japan’s decision to dramatically lower interest rates to boost domestic growth was a mistake. The credit tap was recklessly opened by banks. Businesses also abandoned caution and seized upon this accessible credit. They made significant investments in the building of offices, machinery, and industries. A boom in residential real estate also started.
Land prices, stock markets, and private firm investments all crashed when the Bank of Japan finally began to raise interest rates in late 1989 to stop the economy from overheating. People started to see the corporate world’s unholy nexus at that point.
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Companies and banks were working together, and money was flowing freely. Shares were widely held across many companies. For instance, a staggering 70% of Nikkei companies had also made investments in their direct rivals. A clear conflict of interest existed. And nobody gave a second thought about the small shareholders while on company boards, undeserving individuals were seated.
Top Japanese businesses were also investing heavily in the stock markets. Top brokers like Nomura and Daiwa allegedly promised to shield them from a stock market meltdown and also assisted in hiding losses. And as soon as word of all this spread, confidence in the Japanese business system also did. Investors became extremely wary.
What’s changing next?
In former Prime Minister Shinzo Abe’s three-arrow strategy to revive the economy in 2012 dealing with monetary policy, the first arrow involved lowering interest rates to zero to encourage borrowing. The second arrow was financial; it involved spending money on things like infrastructure. However, the third arrow spoke of corporate governance or structural improvements. The Corporate Governance and Stewardship Codes were introduced by Abe. And the third arrow has begun firing gradually.
Foreign investment funds meddling with how Japanese companies should be operated have never been well received in Japan. As a result, when overseas investors attempted to approach Japanese corporations using a US-style strategy in the 2000s, they were rebuffed.
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The Japanese, however, thought that perhaps they had to take matters into their own hands after the corporate governance standards were introduced. Act now before other foreigners try to meddle. And these Japanese investors began to participate more in corporate decision-making. In contrast to 2015, when they only submitted five shareholder proposals, there are now more than sixty. And the number of activist funds in the nation increased dramatically — from less than 10 in 2014 to about 70 this year. They are attempting to assist Japanese businesses in making wiser decisions for the benefit of shareholders.
Conclusion
All of this is helping to restore faith in the Japanese system. Investors appreciate the goal of reestablishing sound company governance. And they appreciate that stockholders are now receiving the respect they deserve.
Will it be sufficient, though, to finally give the Japanese stock market its due? Investors who have used the “buy and hold” approach since 1989 will be crossing their fingers.
