Nikkei plunge linked to shuffle
Bloomberg News
TOKYO — Don't panic at the Nikkei 225's nosedive below 11,000. The stock average's lowest level in 17 years is the product of a one-time change in its membership, not simply a reflection of Japan's shrinking economy.
Associated Press
Calculations using Bloomberg analytics show the Nikkei would be about 4,000 points higher if 30 stocks hadn't been replaced in April 2000 by its compiler, Nihon Keizai Shimbun Inc.
Japan's benchmark Nikkei index has lost 47 percent of its value since March 2000. Although economic pressures contributed to its drastic decline, many analysts say a one-time change in the Nikkei's membership was a major factor. The change was too late for the Nikkei to benefit from soaring tech stocks up till then.
The Nikkei added computer-related companies such as Kyocera Corp. and Advantest Corp. and removed some miners and steelmakers to make it more representative of a changing economy. The changes were too late for the Nikkei to benefit from soaring technology stocks. Instead, they coincided with a plunge in the Nasdaq Composite Index that serves as their benchmark.
"Worrying about the Nikkei's plunge to 1984 levels is meaningless because of the reshuffle," said Yoshihiko Ito, who helps oversee 150 billion yen ($1.3 billion) in Japanese equities at Asahi Life Investment Co.
Many investors prefer to take their cue from the Topix, whose 36 percent drop since the end of March 2000 is less than the Nikkei's 47 percent decline. This year, the Topix has lost a quarter of its value, though it remains 11 percent above an October 1998 low of 974.35.
Goldman Sachs Group Inc. estimates that 6 trillion yen in funds track the Topix, which includes all 1,472 shares on the Tokyo Stock Exchange's first section, versus 800 billion yen of funds that follow the Nikkei.
"The reshuffle came after the technology bubble burst," said Dai Nishiyama, who helps manage
1 trillion yen at SG Yamaichi Asset Management Co. "Despite the fact that we hear daily news on our stock market hitting a 17-year low, what's really testing a crucial level is the Topix index and that's what we should focus on."
Four Nikkei entrants, Kyocera, Advantest, Tokyo Electron Ltd. and TDK Corp. — accounting for 12 percent of the new Nikkei — fell by an average of almost 60 percent in the past year.
Economic toll
Japan's economy has taken its toll. The Nikkei's plunge was exacerbated by declines in Kyocera and other newcomers as demand for computers and mobile phones in the U.S., their biggest market, slumped. The Nasdaq, which is dominated by computer and telecommunications stocks, lost half its value since the reshuffle.
Compiler Nihon Keizai responded in a written statement that it doesn't accept any blame for the drop.
"Recent consecutive declines in the Nikkei are not due to the reasons peculiar to the index, nor are the result of the component changes last year," it said. "The Topix as well as the Nikkei are declining sharply and they reflect the bearish sentiment in the market based on the weak U.S. stock market and/or uncertainties in the future of the Japanese economy."
Nevertheless, the scale of the Nikkei 225 reshuffle was unprecedented, giving fund managers who track the benchmark little time to adjust their portfolios. Before April 2000, the most additions the Nikkei made on one day were 6 stocks in 1991.
"That meant that Nikkei 225 captured all of the losses and none of the gains," said Jeff Uscher, associate director at WestLB Securities Pacific Ltd.
Topix's 'desperate cry'
Investors are also focusing on the Topix because it better reflects the banks and domestic-oriented companies that are suffering the most from Japan's slump. Banks make up about a tenth of the Topix against 2.6 percent of the Nikkei as of September 4.
The Topix has just 111 points to fall before it breaches its low in October 1998, a month when the government nationalized some banks to keep the financial system from collapsing.
Three years later, banks are again the biggest threat to the economy. Sinking stocks have slashed the value of their equity investments, hindering banks' ability to write off an estimated 17.4 trillion yen of bad loans and preventing them from making fresh loans to healthy companies.
While Prime Minister Junichiro Koizumi has made rebuilding the banking industry the centerpiece of his economic policies, he hasn't said how the plan will work.
"The Topix's slide towards 1,000 is a desperate cry for the government to implement speedy reforms," Asahi Life's Ito said. "If the government fails to respond. We could see another crisis situation."
