As Japan begins it’s slow recovery from the 2011 Earthquake and Tsunami that lay waste to so much of the country’s homes and industry, there is a fierce debate raging as to the long term impact that the disaster (and its aftermath) will have on the Japanese economy. It is therefore, perhaps and interesting point in time to take a look at the history of the Japanese Stock Market.
Japan is one of the world’s largest economies and most important financial hubs. The principal exchange on the Japanese stock market is the Tokyo Stock Exchange (TSE), which is the third largest in the world by market capitalisation (i.e., the value of all outstanding shares of all companies on the exchange) behind only the Americo-European stock exchanges, NYSE Euronext and NASDAQ OMX. It is the largest in Asia and the Pacific region, ahead of both China and Hong Kong. Trading through the TSE is reported by two primary indexes, the Nikkei 225 and the TOPIX. In addition to the TSE there are currently four further stock exchanges operating from other Japanese cities: Osaka, Nagoya, Fukuoka and Sapporo.
The Tokyo Stock Exchange was founded as the Tokyo Kabushiki Torihikijo on May 15th 1878 by Japan’s Finance (later Prime) Minister Okuma Shigenobu together with the prominent businessman Shibusawa Eiichi, however it didn’t begin trading until 1st June the same year. At the time, many of Japan’s largest cities held their own stock exchanges and it wasn’t until after the Second World War that it became the central market place for the Japanese economy that it is today.
The stock exchange actually merged with those of other Japanese cities in 1943, as part of the war effort, to form the consolidated Japanese Stock Exchange (JSE). However, following the Allied bombing of Nagasaki on August 9th, 1945 the infant stock exchange was shut down for four years. The passing of the Securities Exchange Act reorganised the exchange however, and on May 16th 1949 it was re-opened as the Tokyo Stock Exchange alongside two others in Osaka and Nagoya. That year also saw the founding of five other exchanges across Japan: Kyoto, Kobe, Hiroshima, Fukuoka and Niigata whilst the following year the Sapporo Securities Exchange was created.
Shortly after the TSE’s inception, on September 7th, 1950, the Nikkei 225 index was introduced by the country’s leading Nihon Keizai Shimbun newspaper to index the TSE’s top 225 performing companies, retrospectively providing data from the entire post war history of the exchange.
The end of the 20th Century initially saw the value of the TSE’s companies flourish leading to a rapid rise in the exchange’s market capitalisation. The period between 1983 and 1990, in particular, was one of extensive growth, by the end of which the TSE was by far the largest exchange in the world with 60% of the entire world’s stock exchange market capitalisation. The zenith came on December 29, 1989, when the Nikkei hit all time high at an intra-day price of 38,957.44. This growth couldn’t be sustained through the economic troubles that were to follow though and during the ’90s the value of the market fell away. By March 10, 2009 the Nikkei 225 even fell as far as 7,054.98, 81.9% below that high 20 years earlier.
Japan’s Stock Market underwent a considerable re-organisation in the opening year of the 21st Century; on 1st March 2000 the Hiroshima and Niigata exchanges were both merged into the TSE whilst the Kyoto exchange was concurrently merged into the Osaka Securities Exchange to leave the three exchanges that exist today (Kobe had closed in 1967).
In the final year of the 20th Century, on April 30th, the TSE itself witnessed one of it’s most significant developments as the trading floor closed for the last time. At that moment the switch was made to electronic trading. The TSE Arrows complex was opened shortly afterwards on May 9, 2000 to replace the old trading floor and provide a symbol of the new era whilst being a facility for the exchange of information and face-to-face contact.
The incorporation of technological solutions through the exchange has not gone entirely smoothly, however. On November 1, 2005 bugs hit Fujitsu’s transactional system which was only able to operate for trading for 90 minutes during the entire day. TSE’s systems were also alleged to be partly accountable for allowing mistakes by employees at both UBS Warburg and Mizuho (each selling c600,000 shares at 1yen a piece rather than 1 share at c600,000 yen) resulting in loses running into the hundreds of millions of yen for both companies. In the latter case, the affair even brought about the resignation of the TSE’s CEO and two other executives.
The TSE and therefore the Japanese stock market in general continues to develop and look for new opportunities, especially building alliances with other exchanges throughout the world. The TSE has formed a partnership with the London Stock Exchange (LSE) in the UK to jointly investigate products, services and technologies which may benefit both parties. In particular the LSE has been helping the TSE in the last few years with the establishment of a Japanese equivalent to the LSE’s Alternative Investment Market (AIM). There have also been tentative explorations into emerging exchanges in the East including a 5% share purchase in the Singapore Stock Exchange (SGX).
The long term impact of the recent Earthquake and Tsunami which hit Japan are still to be seen. In the immediate aftermath (on Mar 15th) the Japanese markets closed 10% down (the lowest since April 1st 2009) whilst the Bank of Japan injected a massive 15 trillion yen into money markets in the hope of stabilising them.
Both the physical and economic impact was felt worst in the north of the country whose chiefly manufacturing industries account for 8% of Japan’s GDP. Corporate giants such as Toyota, Nippon and Sony were forced to temporarily suspend production in the wake of the disaster and the subsequent logistical difficulties the country has faced (e.g., power cuts). With the overhanging nuclear threat, some multinationals are even moving their staff abroad.
The total cost of the earthquake is estimated to run into tens of trillion of yen. However, there is still much debate as to whether the disaster will significantly damage the market or even as some have suggested, boost Japan’s economy as businesses across the country get stuck into the rebuilding process. Depending on which point of view you take you may even find that this is the opportune time to consider making an investment in Asian Investment Funds.