Investing in the (broad) index doesn’t promise a positive real return. It promises lower volatility than any stock picking strategy. If you want exposure to the Japanese economy, then index investing is still the right choice if you want to maximize return for a given volatility.
It depends on the % of investors that are in those broad indexes. If too many people flock into them, they become more risky than an average stock. And stocks in indexes become overvalued compared to stocks not in indexes.
I really don't see how one example of an index going down makes all the others a bad investment. Sure the Nikkei is diversified across industries but it's not comparable to international indexes.
That's not the only issue with this reasoning, this index is not a total returns one. And if you had been investing regularly you'd have bought companies at the Lowe price, which has produced a 2-3 times return in the last ten years.
I think the point is that "indexes are overall superior to stock picking, and always go up over long periods of time" is disproved by the history of Nikkei.
Sure, at a given time and place, an index may be better. At other times one or two stocks may be better. But I think the "time in the market beats timing the market, always" is kind of negated by Japan's lost decades.