Buffett Indicator: Japan Stock Market Valuations and Expected Future Returns

Country: Japan (updated daily) check out Global Overview for detailed methodology.

The Stock Market is Significantly Overvalued.

Ratio of total market cap over GDP: Recent 20 Year Maximum - 190.02%; Recent 20 Year Minimum - 54.38%; current - 190.02%
Expected future annual return: -4.4%

ETF Used for dividend yield: EWJ (Yield=1.36%)
Market Index used: Nikki225
Current Annual GDP: $5,456 billion US dollars or 565,865 in billions of national currency (GDP in Local Current Prices Annual Growth=1.52%)
Data since year 1984

Japan Historical GDP Growth

Historical GDP of Japan in billions of national currency. The GDP in local current prices has grown at the annual rate of 1.52% over the past 8 years. Please note this growth rate includes the effect of price inflation and it is NOT the real GDP growth rate. Current Annual GDP: $5,456 billion US dollars or 565,865 in billions of national currency.

Historical Stock Market Cap

Historical total market of Japan in billions of national currency. This value is normalized using the data published by WorldBank. Nikki225 is used for the normalization. Use Nikki225 as index, data goes back to 1984. Annual GDP data from IMF, back to 1980, in billions Yen.

Historical Ratio of Total Market Cap over GDP (%)

The current ratio of total market cap over GDP for Japan is 190.02%. The recent 20 year high was 190.02%; the recent 20 low was 54.38%. If we assume that the ratio will reverse to the recent 20 years mean of 103.78% over the next 8 years, the contribution to expected annual return is -7.28%. This is the detailed historical chart of the ratio.

Based on these historical valuations, we have divided market valuation into five zones:

Ratio = Total Market Cap / GDP	Valuation
Ratio ≤ 73%	Significantly Undervalued
73% < Ratio ≤ 93%	Modestly Undervalued
93% < Ratio ≤ 114%	Fair Valued
114% < Ratio ≤ 135%	Modestly Overvalued
Ratio > 135%	Significantly Overvalued
Where are we today (2021-01-25)?	Ratio = 190.02%, Significantly Overvalued

Predicted and Actual Returns

From the equation presented on the U.S. market valuation page,

Investment Return (%) = Dividend Yield (%) + Business Growth (%) + (Re/Rb)(1/T)-1

We can compute the predicted and actual returns of the Japan stock market over a given time period, T. In the calculation, we set T to equal eight years, the approximate length of a full economic cycle. The calculated results are presented in the chart below. The green line indicates the expected, or predicted return if the market ratio trends near the recent 20 years average ratio of 103.78% over the next eight years.

The blue line indicates the actual, annualized return of the Japan stock market over eight years. We use “Nikki225” to do the actual return calculation. We can see the calculations largely predicted the trend in the stock market as the blue line is closely parallel to the green line.

Conclusion

The stock market of Japan is expected to return -4.4% a year for the coming years. This is from the contribution of economic growth in local current prices: 1.52%, Dividend Yield: 1.36% and valuation reverse to the mean -7.28%.

This is the projected return of the stock market in Japan relative to other countries. Click on each bar in the chart to go to other countries:


You can go here to see what international stocks Gurus are buying.