On this day in economic and business history …
The Nikkei 225 began its calculations on Sept. 7, 1950, with its “birthday” retroactively backdated to May 16, 1949. On its first day in action, the Tokyo Stock Exchange termed it the “TSE Adjusted Average Price,” but the name didn’t stick for long. Like its American counterpart, the Dow Jones Industrial Average , it has always been calculated by a leading Japanese financial newspaper, the Nihon Keizai Shimbun, more popularly known simply as simply Nikkei.
The Nikkei, like the Dow, is calculated on a price-weighted basis, except that in the Nikkei’s case all 225 stocks are adjusted based on a presumed “par value” of 50 yen per share. In reality, higher share values still result in a larger weighting. For example, the Nikkei’s largest component at the end of 2012 was Fast Retailing, which comprised 8.4% of the index based on its price of 21,840 yen at the time — equal to about $220.
The similarities between the two indexes bound them closely enough together to rebrand the Nikkei as the “Nikkei Dow Jones Stock Average” from 1975 to 1985. However, the Nikkei does diverge from the Dow in one crucial way: In theory, it is designed to fairly represent all sectors of the Japanese economy, but in practice, more than 40% of its weighting comes from technology stocks. In contrast, the Dow derives only about 15% of its value from the tech sector, and more than half of that weighting comes from one particularly high-priced stock.
On its first official day of retroactive existence (in 1949), the Nikkei and the Dow closed at nearly identical values: The Nikkei’s recorded value was 176.21, and the Dow’s was 175.76. However, by the time the Nikkei was actually calculated for the first time in 1950, the two indexes had diverged markedly, and the Nikkei was reduced to 110.82 points while the Dow enjoyed the early days of its postwar bull market surge to close at 218.33 points. By 1952, however, the Nikkei regularly closed above the Dow, and it would continue to outpace its American counterpart until suffering a downturn in 1955. The Nikkei finally surged past the Dow for the long term as 1956 gave way to 1957, and it would remain in the lead for 45 years. This period is marked by one of the greatest stock market boom-and-bust cycles in world history.
From the time the Nikkei broke out above the Dow in 1956 to its all-time high in 1989, the Japanese index rose at an eye-popping annual rate of 13.8% per year for 33 straight years. The Dow, by comparison, gained a far more modest 5.3% per year during that time. At no other time in the Dow’s history has it even come close to matching this performance for such a long period of time.
The only comparable period in Dow history might be the secular bull market of the baby boomers, which continued for just over 17 years and produced annual gains of 17.3% per year. On a longer time frame (from 1982 to 2013) the Dow’s annual growth drops to 10.2%. Over 33 years, the difference between annual gains of 13.8% and 10.2% would earn you an additional $4,660 on an initial investment of just $100. That’s a big deal, to put it mildly.
