FACTBOX-Japan’s Nikkei then and now, as shares near ’89 record

By Rocky Swift

TOKYO (Reuters) – Japan’s benchmark stock index is nearing its all-time high of 38,957.44 set on Dec. 29, 1989 in the heady days of the country’s bubble economy. But like Japan itself, the Nikkei is very different from 34 years ago – especially in terms of the companies that comprise it and what they are worth.

HISTORY

The Nikkei Stock Average is a price-weighted index of 225 large, widely traded Japanese companies and the most popular benchmark for Japan’s stock market.

It was started in 1950, shortly after Japan’s stock market reopened after World War Two. Its name is a contraction of “Nihon Keizai,” which means “Japan Economy” and comes from the name of the newspaper company which compiles it, Nikkei Inc.

COMPOSITION

The Nikkei is reset twice a year when companies may be added or subtracted based on their size and liquidity, so the index’s composition has changed a lot over the past three decades.

In 1989, banks and utilities were among the biggest companies on the Japanese stock market and were more heavily weighted on the Nikkei (see Table 1). Now, about 50% of the Nikkei’s weighting is in technology companies while the second-biggest segment is consumer goods, at 23%.

Table 1: Tokyo Shares in 1989

Rank Market value Previous name Present name (RIC) Present rank

(trln yen)

1 15.00 Industrial Bank Mizuho Financial Group 27

of Japan 

2 10.55 Sumitomo Bank Sumitomo Mitsui (NYSE:) 13

Financial Group

3 9.99 Fuji Bank Mizuho Financial Group 27

4 9.12 Dai-Ichi Kangyo Mizuho Financial Group 27

Bank

5 9.16 Mitsubishi Bank Mitsubishi UFJ (NYSE:) 2

Financial Group

6 8.13 Tokyo Electric Tokyo Electric Power 142

Power Holdings

7 8.09 Sanwa Bank Mitsubishi UFJ 8306.T 2

Financial Group

8 7.94 Nippon same 9432.T 6

Telegraph and

Telephone (NTT)

9 7.71 Toyota Motor (NYSE:) same 7203.T 1

10 6.74 Nomura Nomura Holdings (NYSE:) 8604.T 77

Securities

Table 2: The Nikkei Today

Rank Market value Name (RIC)

(trln yen)

1 55.47 Toyota Motor

2 25.54 Mitsubishi Corp

3 18.30 Mitsubishi UFJ

Financial Group

4 16.70 Keyence (OTC:)

5 16.40 Sony (NYSE:) Group

6 16.36 NTT

7 16.13 Tokyo Electron

8 13.29 Fast Retailing

9 12.34 Softbank (OTC:) Group

10 12.11 Shin-Etsu Chemical

VALUATION

While the numerical peaks are similar, today’s Nikkei is much cheaper than the one in 1989. At the height of Japan’s bubble, the nation’s stocks accounted for more than 40% of global equity values, but now make up less than 6%, displaced by the growth of China and other developing markets.

The price-to-earnings ratio, a popular valuation measure, for Nikkei companies rose to about 60 during the previous peak, whereas now it is about 16.

Looking at price-to-book ratios, another common valuation metric, major Tokyo-listed firms sold for more than 6 times their break-up value in late 1989. The average PBR for Nikkei companies now stands at 1.47, and many Japanese firms are priced at below 1, an oddity in global markets.

MOOD

The Nikkei Volatility index, a so-called “fear gauge” among traders, stood at 20.65 on Feb. 21, not much different from 20.3 on Dec 29, 1989.

But the difference in Japan’s economic prospects in the intervening 34 years could not be more different.

Japan was then seen as potentially eclipsing the U.S. as the world’s dominant economy, and the country was flush with cash. Now, Japan still carries the scars of decades of deflation and is grappling with a shrinking economy, a dwindling labour force and a sense of diminishing influence on the world stage.

Even so, the decades of doldrums have made Japan a relative bargain, inviting the interest of foreign investors, such as billionaire Warren Buffett. And the Tokyo Stock Exchange has recently increased pressure on companies trading below their book value, leading to waves of share buybacks and management buyouts that have helped sustain investor enthusiasm.