Nikkei closes below Dow

February 1, 2002 Posted: 2137 GMT

By Staff Writer Alexandra Twin

NEW YORK (CNN/Money) -- Shaky corporate profit and economic growth prospects, global pressure, a struggling equity market. Sound familiar? The country in question is not the United States, but rather Japan. And for the first time, Japan's Nikkei 225 has fallen below the U.S.'s Dow Jones industrial average.

On Friday, the Nikkei 225 closed at a four-month low of 9,791.43. The Dow Jones industrial average closed Friday at 9,907.26.

While it's not unheard of for the 225-issue index to close out below 10,000 –it is unheard of for it to fall behind the Dow, Ian Shepherdson, chief economist at High Frequency Economics, pointed out in a morning note.

The fundamental differences in the make-up of the two nation's markets may deem such a number-specific comparison immaterial. In addition, April 2000 saw a revision in rules regarding the addition and deletion of stocks in the Nikkei 225 which resulted in the inclusion of a larger number of volatile technology names, which would create some discrepancies for comparison purposes.

So what does this Dow-Nikkei switch signify, beyond an interesting bit of trivia?

"It's a real statement that despite Enron, (the terrorist attacks of) 9-11 and the recession in the U.S., Japan is having a worse time," said Mark Headley, a portfolio manager for the Matthews International Funds. "But beyond the symbolism, it doesn't mean much."

Michael Goodson, director and Asian equity strategist at Salomon Smith Barney, noted that in 1989 when the Nikkei peaked at 38,915.87 the Japanese equity market was larger than the U.S. equity market. Now it's one-third the size.

In addition, the U.S. came out of a period of lackluster trade in the late 60s and early 70s following Watergate and Vietnam and had a tremendous turnaround, Goodson said. 

The more interesting issue is that the U.S. equity markets have been in an extended growth period and the Japanese markets have been in a tighter trading range for 18 years, Goodson said.

"In 1989, we thought the Japanese market was invincible and that hasn't proven to be true," Goodson said. "Japan's market can snap back, just like the U.S. market did. It's just a matter of when."

Perhaps what the pullback does demonstrate is just how challenging conditions in Japan have become.

Japanese investors rushing to bring money back into the country in time for the end of the fiscal year on March 31 will increase upward pressure on the yen and exert downward pressure on Treasuries and global equity markets, Shepherdson wrote.

He also noted that Standard & Poor's warned of another credit downgrade Thursday as banking sector problems grow, writing that "all the signals are in place for the next banking crisis and a continued Nikkei decay."