Back to a Sorry Future for the Nikkei


Here's a new market marker for the 21st century: Japan's once-mighty Nikkei has fallen below the Dow for the first time since 1957. The Nikkei 225-stock index closed on Friday, Feb. 1, at 9791.43, while the Dow Jones industrial average closed at 9920.00 on Thursday, Jan. 31, and remained above the Nikkei the following day, closing at 9907.26.

What's the long-term significance? Simply that, even with the dot-com bubble bursting and the aftermath of September 11, the U.S. stock market has had a pretty good run since the beginning of the '90s, while the Japanese market performance has been perfectly awful.

On December 29, 1989, the Nikkei hit an all-time high of 38,915. The Dow closed that day at just 2,753. The discrepancy between the two indexes summed up investors' views of the two countries at the time: Japan was invincible -- and the U.S. was washed up.

"GIGANTIC PONZI SCHEME." Back then, Japan was snatching up trophy real estate from midtown Manhattan to California, and its phone company -- NTT -- was the world's most valuable company. The U.S. stock market, meanwhile, was still struggling back from its heart attack of October, 1987.

Ironically, one reason Japan's stock market is so low now is that it was so high then. The entire Japanese economy became one big bubble, and since it popped the country has never recovered. "They've tried to paper over the cracks. But the cracks just got wider and wider," says Ian Shepherdson, chief U.S. economist for High Frequency Economics in Valhalla, N.Y.

Shepherdson disputes the conventional wisdom that Japan's bubble was mainly in real estate. "The whole [Japanese economy] was just a gigantic Ponzi scheme" in the late 1980s, he says. Collectively, the stocks in the Nikkei were trading at a price per share that was 150 times their earnings per share. In the U.S., a typical price-earnings multiple is more in the range of 15 to 20.

MORE BAD NEWS. The U.S. had its own bubble in the late '90s, but it was concentrated mainly in technology. And most of the inflation was in the stock market, so the main losers were stock investors, Shepherdson says. In contrast, Japan's bubble involved bank loans. Says the economist: "In Japan, when a bank loses money, it loses the ability to lend to other people, so you get a substantial knock-on effect. Even people and companies whose finances are fairly healthy can't get credit, so they go bust as well."

As a result, Shepherdson thinks the Nikkei will remain below the Dow for some time to come. What dragged down Japanese stocks on Feb. 1 was more bad news about earnings at tech companies and banks. NEC, Toshiba, and Fujitsu have been damaged by a severe slump in the semiconductor industry. And banks remain burdened by bad loans.

The Nikkei nearly fell below the Dow on the day after the terrorist attacks on the U.S. last September 11. The Nikkei plunged sharply, while the Dow didn't budge because the New York Stock Exchange was closed. On Sept. 12, the Nikkei closed at 9610 -- only 5 points above where the Dow closed on Sept. 10, the day before the attacks.

Like the Dow, the Nikkei, which began in 1949, is an old-fashioned price-weighted index, meaning that stocks of small companies with high prices have disproportionate influence on the index' level. The last time it was below the Dow was on August 5, 1957, when the Dow was at 500.77 and the Nikkei was at 495.7, according to a review of data on the Dow from Bloomberg Financial Markets and data on the Nikkei from Thomson Financial Datastream. The following day, Aug. 6, the Dow dropped 6 points, the Nikkei gained 2 points, and it never looked back. That is, until Friday, February 1, 2002. By Peter Coy in New York


Steve Ballmer, Power Forward
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