Overheated Zone with Buffett Indicator Over 200%—If the US Stock Mothership Sinks, the Japanese Market Will Be Helpless

The market capitalization of Japanese stocks is approximately 8.09 trillion dollars (about 1.25 quadrillion yen) in dollar terms, which is only about 10% of that of the United States. Looking at the “Buffett Indicator,” which divides stock market capitalization by nominal GDP, the Japanese market has also reached around 200%. According to the standard set by Warren Buffett, who stated that “around 100% is an appropriate level, and significantly exceeding it warrants caution against overvaluation,” the Japanese market is also positioned in a high-price range pushed up by money rather than the scale of the real economy.

Amid this overwhelming scale disparity, the Japanese market is effectively placed in a structure like a “small boat (satellite market) following the giant mothership of Wall Street.” This is because overseas funds, which account for 60% to 70% of trading value on the Tokyo Stock Exchange, adjust their global assets under management collectively according to the risk tolerance of the S&P 500, which holds about 60% of the world’s market capitalization. In weeks when US stocks are bought, risk money spreads and Japanese stocks are also net-bought, and in weeks when US stocks collapse, they are the first to be net-sold, led by futures.

Excluding temporary deviations due to exchange rates or policy factors, the view that “the trend of the S&P 500 is a leading indicator for Japanese stocks with a probability of about 70%” is extremely rational. Before chasing individual domestic factors, grasping the market distortion indicated by the Buffett Indicator and the movement of funds on Wall Street is the major prerequisite for investment management.