Editor’s note: This article was first published in May 2014, with the Nikkei at about 14,500 points. The index finally surpassed its 1989 record in February 2024, so the permanently bearish description and the closing question have aged.
It is said that Japan has one of the weakest stock market cultures on the planet, with only 8% of Japanese people investing in the stock market. And no wonder: while we all know that long-term investing in the stock market is the most profitable option, in Japan this kind of investing has cost people money.
Ever since Japan’s benchmark index, the Nikkei, reached a peak of close to 40,000 points in 1990, it has kept making lower highs. In other words, it has been falling. While every other index rises over the long term, the Japanese index, despite including world-leading companies, has been a completely bearish index over the long term.
Many businesspeople and investors made huge fortunes in the Nikkei’s astronomical rise, which took it from 10,000 points in 1984 to almost 40,000 in just six years.
After the dizzying fall of 1990, the research houses of the day loudly proclaimed that this price level (30,000 points) was an excellent buying opportunity, and the index did indeed recover a little. But the joy did not last even twelve months: the index suffered another sharp drop, to around 20,000 points.
From then on, every time there were signs of a rally, investors ran into one fall after another, to the point that they began to fear the Nikkei, considered one of the fastest and most volatile indexes in the world: it can fall or rise 8% in a couple of hours as if it were nothing. It is ideal for speculating and very dangerous for staying in for the long term.
The exception that wore out Japanese investors’ patience
It was in 2000, with the dot-com crash, that the Japanese watched the index fall until it touched 7,000 points in 2003.
The United States was recovering, and the world economy, immersed in the real estate and mortgage boom, was enjoying a historically good moment. Even so, Japanese investors did not have much confidence in the stock market, because most of them had relatives who had lost practically all their money in it.
Then big brokerage firms appeared, explaining what an excellent investment opportunity it was: a global economic recovery that could take the Nikkei back up to 30,000 points.
Japanese investors began to warm to the stock market again in 2005 and 2006, buying in at around 10,000 and 11,000 points. They started making money, and that encouraged others to join in.
Then came the mortgage crisis, and the Japanese once again watched the Nikkei fall from 18,000 points back down to 7,000 in little more than twelve months.
So the fund management business in Japan is not exactly profitable, and stock market advice is very hard to find, but…
Now it’s for real
Now big investment banks are opening branches in Japan, because they believe the Japanese could have a great investment opportunity in this market. They talk of high hopes for a rally in the Nikkei, which currently stands at 14,500 points.
So when Japanese investors are encouraged to invest in the stock market again, what does it mean if we follow this index’s history? That something big will happen so that Japanese investors lose money once more. Then again… what if this time it’s different? 🙂
The curse of the Japanese investor is no different from the curse of the retail investor who tends to get into the market just in time to take a fall. Read:
- Probably the mother of all stock market investing mistakes
- David Einhorn: 5 poker tips applied to stock market investing
Featured image: Dick Thomas Johnson, CC BY 2.0, via Flickr.
