Is TOPIX Overvalued? (1)

Correlation Between Stock Market Capitalization and Nominal GDP

Since 2023, stock indices such as the Nikkei Average and TOPIX have been performing well. Just as I was about to write a blog post considering whether the current stock prices are overvalued, TOPIX reached an all-time high of 2,898.47 points as of July 4, 2024.

Additionally, the front-page article of the July 5 edition of the Nikkei newspaper reported that the market capitalization of the Tokyo Stock Exchange Prime Market has reached 1000 trillion yen for the first time.

It seems that my blog topic on whether TOPIX is overvalued has been preempted, and the content has become outdated. Haha.

Before it becomes entirely obsolete, I quickly posted a blog article focusing on the correlation between stock market capitalization and nominal GDP.

To add a bit of originality, I created a graph showing the combined market capitalization of the TSE Prime Market and TSE Standard Market.

The TSE Growth Market, established in 2022, is significantly smaller in scale compared to the Prime Market, even when including its predecessor, the JASDAQ Market, so I have not considered it here.

As can be seen from the graph, there is a correlation between market capitalization and nominal GDP.

Ratio of Market Capitalization to GDP

However, when looking at the ratio of market capitalization to GDP, it is evident that market capitalization is rising more rapidly than GDP.

Does this imply that stock prices, as represented by TOPIX, are becoming overvalued?

For now, I have written this article in haste, so I will continue this topic in the next post

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