• 05.30.14

Tokyo’s Nikkei index rises over 57%, the highest in 40 years

Shawn Baldwin Discusses The Rise of the Japanese Stock Market

Tokyo’s Nikkei index rises over 57%, the highest in 40 years
Shawn Baldwin at the Tokyo Stock Exchange

The Japanese stock market continued to surge giving the Nikkei 225 index a gain of 56.7% for the year–outpacing all other major markets including the Dow Jones and the FTSE 100. The Nikkei’s 2013 performance was its best year since 1972, in that year the market increased an incredible 92%.


The additional 0.7% gain on the last trading day made it the index’s highest level in the last (6) six years, signaling a massive reversal of Japan Inc.’s fortunes. Prime Minister Shinzo Abe commented on the benchmark, leaving his vacation to ring the closing bell at the Tokyo Stock Exchange. Mr. Abe cited the historic highs as positive results from his administration’s monetary policies dubbed “Abenomics”–the focus of these policies has been to create liquidity from loose monetary policy that will serve to power inflation in the real economy. Japan has had a 20 year period of stagnant growth and deflation. In his comments at the closing ceremony, Mr. Abe urged his countrymen to use the hundreds of thousands in bonuses provided by the performance to ” keep it moving..”

Apparently foreign investors are encouraged by the policies, as approximately over $125 billion of overseas money was invested in Japan, the highest amount since 2005. This is what caused Nikkei 225 index to rise to 16,291.31 and outpace the Topix on the final trading day of the year. The much broader Topix closed up 0.95% up to 1,302.29 with an impressive 52% gain for the year. When the Nikkei gains faster than the Topix it is a sign that overseas investors are buying equities thematically as a bet that there will be a weakening currency and stronger stock market. This is called short yen/long stocks by traders, due to the smaller composition of stocks in the Nikkei (225 companies) foreign investors find it much easier to research and invest in the Nikkei Index. In contrast, the Topix which is composed of 1755 companies, is much more complex and creates a need for a deeper understanding of the country and companies.

Prime Minister Abe and his administration have sought to end a condition that the Japanese call “Cho Endaka”–which means ultra high yen. In one year, the Japanese currency has dropped approximately one fifth against the US dollar, this has created a tremendous boost for the export driven Japanese economy and is the result of cheap yen and rising stock prices. The close of the session saw dollar buying 105.35 yen, a dramatic increase from the 87 yen level at the end of 2012. Look for the Nikkei to be a source of volatility and a major focal point of the trading and investing community, as trading experts have called for a range of 18,000 to 20,000 in the Nikkei for 2014.

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About the author

Shawn D. Baldwin is Chairman of the AIA Group (AIA), an alternative investment and advisory firm based in Chicago.