Nikkei 225 Compared to the Dow Jones

This analysis examines the Nikkei 225 and Dow Jones Industrial Average after adjusting for inflation using M2 currency supply. It illustrates the impact of currency expansion on both indices and their real value. The Nikkei has shown a downward trend while the Dow has risen significantly, reflecting a shift in global economic status.

John Gideon Hartnett

February 26, 2024

4–5 minutes

de-inflated, DJIA, Dow Jones, Japan, M2 currency supply, Nikkei, Nikkei 225, USA

Photo by Tomu00e1u0161 Malu00edk on Pexels.com

This analysis looks at the Nikkei 225, an index of highly liquid stocks on the Japanese stock exchange. I compare that index to the Dow Jones Industrial Average (DJIA) after the effects of inflation have been stripped out using the M2 currency supply in their respective economies.

Chart 1: Japanese M2 currency supply on log-linear axes. Data from Macrovar and the International Monetary Fund, M2 for Japan [MYAGM2JPM189N], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MYAGM2JPM189N, February 24, 2024.

Chart 1 shows the Japan M2 currency supply from January 1, 1967 to January 31, 2024. Only a few percent of data points are shown. It is apparent the trend line has an inflection point around 1990, where the slope changes. The red curve is the sum of 2 exponential curves to fit over the whole domain. I have extended the fit to 1950 in order to use it to normalise the Nikkei index to 1959 Yen. See Chart 3.

Chart 2: Reciprocal of the US and Japan M2 money supply on log-linear axes. The difference between the two curves will be partly due to the USD/JPY exchange rate. The US Federal Reserve M2 data from Board of Governors of the Federal Reserve System (US), M2 [WM2NS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/WM2NS, February 25, 2024.

If the M2 currency supply growth results from “money printing”, credit creation by the central banks, then the inverse, the reciprocal of M2 must represent the value of the currency at any moment of time. It is this curve that the index (Nikkei or DJIA) is multiplied by to normalise it to Yen or Dollars at a fixed date. Therefore over its domain the dollars or yen are of the same value.

In Chart 2, the top green curve is the reciprocal of the US M2 currency supply and the bottom blue curve is the reciprocal of the Japan M2 currency supply. The units on the vertical scale are 1/$ for the US M2 and 1/Y for the Japan M2 supply. It is very apparent that the real value of these currencies rapidly approach zero. Fiat Ponzi scheme “money printing” will eventually collapse with the fraud.

On a log plot a straight line is an exponential curve. The US M2 supply can be represented fairly well with a single exponential, but as shown there are two domains before and after 1990 where two different curves (1) and (2) could be used. However the Japan M2 supply cannot be approximated with one exponential. I have used 2 curves (3) and (4) which fit well before and after 1990. The fitted curve in Chart 1 is the sum of curves (3) and (4).

Using the blue curve ((3)+(4)) from Chart 2 to normalise the nominal Nikkei index to 1959 Yen we get the result in Chart 3.

Chart 3: Nikkei 225 data normalised to 1959 Yen using the reciprocal M2 Japan data from Chart 2. Nikkei Industry Research Institute, Nikkei Stock Average, Nikkei 225 [NIKKEI225], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/NIKKEI225, February 24, 2024. The sepia strips indicate recessions in the USA.

From this we see that the effects of M2 currency expansion have been stripped out. The Nikkei has been de-inflated and as a result shows only a small downward trend reaching a bottom in 2009 after which it has been trending up. After World War II Japan’s economy was really cooking but by the end of the 1950s it has been in decline.

**Chart 4:** **The Dow Jones Industrial Average (DJIA) index normalised to 1914 dollars. The nominal data was downloaded from** MacroTrends Historical Data. Using the M2 Money supply from the Federal Reserve Board of Governors (FRED) (Chart 3 above) an empirical formula was developed for the deflation of the dollar as a function of time. That was used to normalise the DJIA index to 1914 dollars. For an explanation of the method see Charts 1 and 2 here. The Nikkei normalised to 1959 Yen is shown here for comparison. The horizontal solid line is the mean value of the Dow index = 41.418. The horizontal dashed line is the mean value of the Nikkei = 315. Units on the vertical axis are either Dollars or Yen depending on the index. The pink regions denote world wars, and sepia strips indicate US recessions.

This fact is clearly demonstrated when the de-inflated Nikkei index is compared to the de-inflated Dow Jones index. See Chart 4.

Since about 2000 one can notice a strong relationship between the Nikkei and the Dow. Yet since then the Nikkei has been on an upward trend whereas the Dow has been stagnant, only moving sideways. Over longer times, since 1950 the Nikkei has fallen in real value by about a factor of 10. Over the same period the Dow Jones has risen by about a factor of 30. So I am not surprised that Japan has slipped in its status from the second biggest economy.

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