Japanese stock market 30-year cycle review: Investment insights from the Nikkei 225's rise from the bottom to a historic breakthrough

The Nikkei 225 Index is a barometer reflecting the vitality of the Japanese economy. Comprising the 225 most outstanding publicly traded companies in Japan, this index’s historical trend encapsulates over thirty years of Japan’s economic ups and downs. From its peak of 38,957.44 points in 1989 to the trough of 7,000 points in 2009, and back to surpassing 40,000 points in 2024, every turning point of the Nikkei index records a profound economic story.

The Evolution of Japanese Stock Prices: From Average Stock Prices to Contemporary Indices

The predecessor of the Nikkei 225 was called the “TSE Corrected Average Stock Price,” established in September 1950. At that time, Japan was just beginning post-war reconstruction. This index consisted of 225 companies listed on the First Section of the Tokyo Stock Exchange, used to gauge overall market trends. It was not until May 1, 1985, that it was officially renamed the Nikkei Average Stock Price, known today as the Nikkei 225.

The index’s components include automotive giants like Toyota, Honda, Nissan; electronics leaders like Sony, Panasonic; and top companies in various fields such as Kao, Shiseido, SoftBank. They represent Japan’s key industries, and their stock performance directly reflects the country’s economic pulse.

In September 1986, the Singapore International Financial Exchange launched the Nikkei 225 futures contract, marking Japan’s stock prices stepping onto the international stage and a significant milestone in the index’s development history.

The Four Major Cycles of Japanese Stock Prices: Prosperity, Collapse, Dormancy, and Revival

The Crazy Capital Era (Before 1989)

In the late 1980s, Japan’s economy was at its peak. The Bank of Japan’s ultra-loose monetary policy injected massive liquidity into the financial system, with interest rates pushed to historic lows. Abundant capital fueled an unprecedented investment wave, especially in real estate and technology sectors, with speculative enthusiasm reaching madness.

Japan’s strong economic growth, its manufacturing sector’s global leadership, and booming exports further boosted investor optimism. On December 29, 1989, the Nikkei 225 soared to a record high of 38,957.44 points. At this time, the overall P/E ratio of the Tokyo stock market reached about 58, with many loss-making or marginally profitable companies holding huge market capitalizations, fully reflecting a market detached from fundamentals.

The Lost Thirty Years (1990s to 2000s)

After the bubble burst, the Nikkei 225 began a long decline. Between 1990 and 1992, the index fell over 70%. Although there were rebounds in subsequent years, the overall trend continued downward. The 2000 dot-com bubble burst impacted global markets, and the Nikkei 225 briefly hit a low of 8,000 in 2003.

The 2008 global financial crisis again severely damaged Japan’s stock market. In 2009, the Nikkei 225 reached a historic low of 7,000 points. Technically, this bottom was not much lower than in 2003, indicating strong support around 7,000 points. However, fundamentally, Japan’s economy was still burdened by debt left over from the bubble burst, making it difficult for the stock market to perform well.

The Bull Market of Abenomics (Post-2012)

Since 2012, the situation began to change. The Japanese government introduced a series of reforms, including monetary easing, fiscal stimulus, and structural reforms—collectively known as “Abenomics.” Under these policies, the Nikkei 225 entered a long-term upward trend, revitalizing the market.

Breakthrough in the Post-Pandemic Era (After 2020)

The COVID-19 pandemic caused huge shocks to global financial markets, but Japan’s financial markets demonstrated strong resilience. After the pandemic, the market rebounded quickly, closing at 39,098.68 points on February 22, 2024, finally surpassing the high from 30 years ago. In 2024, the Nikkei 225 further broke through the 40,000-point mark, rising about 20% in just over two months.

Current Valuation Attractiveness of Japanese Stocks

Compared to 30 years ago, today’s Japanese stock valuations are much healthier. Currently, the overall P/E ratio of Japanese listed companies is about 14, far below the nearly 20 times of the S&P 500. Many Japanese stocks are even trading below their book value, indicating that the market has yet to fully recognize the true worth of these companies.

Several factors underlie this valuation gap. First, the long-standing deflationary environment that plagued Japan has improved. The Bank of Japan’s long-term negative interest rate policy has finally yielded results—by January 2024, inflation reached 2.2%, exceeding the 2% target for 22 consecutive months. As inflation rises, the returns on household and corporate savings decline, forcing large amounts of capital back into the stock market.

Second, foreign capital inflows are accelerating. Notable investor Warren Buffett visited Japan multiple times in 2023 and significantly increased his holdings of Japanese stocks, setting an example that has spurred global capital interest in Japanese equities. This wave of foreign investment signals a renewed recognition of Japan’s market value.

Third, the Japanese government is pushing companies to reduce cross-shareholdings, which will further attract overseas investors seeking transparent governance structures.

Technical Analysis: Short-term Adjustments and Long-term Potential

Based on technical indicators like RSI and MACD, the performance of the Nikkei 225 in mid-March 2024 shows RSI(14) reaching 72.80, approaching the overbought zone at 75, suggesting that the index may face short-term correction pressure. Meanwhile, MACD also indicates a possible slowdown in the upward momentum. Investors should remain cautious and consider taking profits.

However, from a long-term perspective, this correction is just a buildup for a new wave of growth. If the P/E ratio of the Nikkei 225 further recovers to 17, it could theoretically reach 48,000 points, about 20% higher than current levels. Given the improvement in Japan’s economic fundamentals and ongoing international capital inflows, this target is not out of reach.

Core Reasons to Invest in Japanese Stocks

Diversified Risk Allocation: The Nikkei 225 covers multiple industries such as automotive, electronics, finance, and consumer sectors. The volatility of individual stocks or sectors is less likely to impact the entire index, making it a more controlled risk compared to buying individual stocks.

Cost Efficiency: As a passive index product, management fees are much lower than active funds, providing a clear long-term cost advantage.

Rational Trend-following Strategy: Retail investors often find it hard to beat the market but can choose to align with the market by buying index funds, following the major trend—an approach recommended by professional investors.

Leverage Opportunities: For those trading Nikkei 225 CFDs, less capital can be used to leverage larger gains, suitable for active traders with risk tolerance.

Investment Strategies for Japanese Stocks in 2024

Looking into the second half of the year, the Bank of Japan has signaled a clear intention to raise interest rates, ending the era of negative interest rates. This will push investors to abandon the old mindset of holding cash for preservation, directing assets into stocks for better returns. Coupled with improved corporate governance and increased foreign capital inflows, the Nikkei 225 still holds long-term upward potential.

Given the technical overbought signals in the short term, investors are advised to:

• Wait and observe or hold light positions, anticipating a correction
• Accumulate gradually near support levels
• Set take-profit points to lock in gains
• Monitor BOJ rate hike developments and corporate earnings data for subsequent decisions

After 30 years of stagnation, Japan’s stock market breakthrough this time signifies the dawn of a new era. Seize the opportunity, but also stay rational—this is the correct approach to participating in this wave.