Japan's Nikkei 225 now at a 26-year low

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As the Dow Jones Industrial Average and the S&P 500 trade at 12-year lows, Japan's bellwether Nikkei 225 Stock Average lost 1.2 percent, or 88 points, on Monday to close at its lowest level in 26 years -- 7,086 points.

The U.S.'s second biggest trading partner got some bad news today. It registered a current account deficit for the first time in 13 years due to plunging exports. It's enough to tune into news out of Toyota (TM) or Sony (SNE), Nissan (NSANY) or Sharp, to realize how bad the world's second-largest economy exports have become as global demand dried up. They've plummeted 45.7 percent in January compared to January of last year. While imports dropped a significant number as well, it wasn't enough to offset the export drop.

Of course, one data point wouldn't have driven the Nikkei to such lows. It's been a barrage of bad news recently, from industrial output declining a record 10 percent in January to today's announcement that bankruptcies grew 10 percent during February from a year earlier.

For the U.S. investor, this may sound pretty normal (for the past year that is), given the barrage of the nation's own bad news. From Friday's 8.1 percent U.S. unemployment rate to the dismal housing market, production, the ballooning budget and national debt, and so on.

But the United States is not Japan, even if the Japanese and U.S. markets have performed nearly the same over the past year. The Nikkei-225 has fallen 20 percent so far in 2009, after a record 42 percent slump last year. The S&P 500 declined 24 percent so far in 2009, and recorded a similar decline to the Nikkei last year. The Dow also declined over 24 percent year-to-date, but only 33 percent in 2008.

The main difference lies in what happened in the 1980s. Nearly 20 years ago, the Nikkei reached an all-time high of 38,916 as Japan went through a "bubble" economy fueled by soaring real estate and stock prices (sound familiar?). The bubble burst in the early 1990s and led to a long slump. Monday's close is just 18.2 percent of that all-time high.

While the S&P 500 slumped some 56 percent from its record high of 1565 set on Oct. 9, 2007, and the Dow Jones dropped 53 percent from its all-time high of 14,164.53, also set in October 2007, it's a far cry from the October 1982 levels of around 130 and 1,000 respectively.

But if economists worst fears of stagnation and L-shaped recovery come true, how low can we go?

All around the world, stocks are plummeting: the MSCI's all-country world index is trading just above its October 2002 lows, but will likely fall to 14-year lows; the DJ STOXX 600, a broad gauge of pan-European stocks, on Monday hit its lowest level since September 1996.

As for the United States, the bearish calls are for the Dow to reach 5,000 or S&P 500 to drop to 500, which are 1995 levels, and are 27 percent and 25 percent away respectively. With the markets down nearly as much year-to-date, and the economy not showing signs of a near bottom, these predictions don't seem such a far stretch. Let's hope not.

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