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Japan: Post-Bubble Market Rallies and Bond Yields

  • Written by Syndicated Publisher No Comments Comments
    February 13, 2013

    Note from dshort: Japan’s Nikkei 225 has been on a tear of late, rising above its previous interim high set in April of 2010. The index made headlines over the weekend with Japan’s economic minister’s controversial advocacy of government policy to target stock gains. According to the Japan Times, he wants the Nikkei to hit 13,000 by the end of the month. That will require a February gain of 17%.


    Here is a quick look the Nikkei 225 with an overview of the cyclical rallies and their duration during Japan’s secular bear market, now well into its 22nd year. I’ve also included an overlay of nominal and real Nikkei performance and the pattern of inflation/deflation. And finally, we’ll have a look at Japan’s 10-year yield.

     

     

     

    The table below documents the advances and declines and the elapsed time for the major cycles in the Nikkei.

     

     

    Nikkei 225 Advances and Declines

     

    The Nominal versus Real Nikkei 225

    For most major indexes, we expect to see a significant difference between the nominal and real price over a multi-decade timeframe. But Japan’s chronic bouts of deflation have kept the two metrics rather tight. Note that I’ve used a log vertical axis for the index price to better illustrate the relative price changes over time.

     

     

     

    Japanese Bond Yields: How Low Can They Go?

    Government bond yields in many safe-haven countries have plunged since the Financial Crisis, although the US 10-year, now hovering around two percent, is off its historic closing low of 1.43 percent set in July of last year. The lesson from Japan is that the trend toward lower yields can last a very long time. Here is an overlay of the nominal Nikkei (linear scale) and the 10-year bond along with Japan’s official discount rate.

     

     

    And here is a closer look at the 10-year yield over time.

     

     

    Will Japan’s Nikkei hit the economic minister’s 13,000 target by March? That would require a 17% gain for the month of February. My data for the Nikkei, which dates from 1984, shows the largest one-month gain as 20.1% in October 1990. March 1986 and January 1994 are in a close tie for second place at 16.3% and 16.1%, respectively.

    Can anyone imagine the US Fed setting market targets? Stay tuned!

     


    Note: The “recessions” highlighted in the third chart above are based on the OECD Composite Leading Indicators Reference Turning Points and Component Series. I use the peak-to-trough version of data (peak month begins the gray, trough month is excluded), which is conveniently available in the FREDrepository. As we can readily see, the OECD concept of turning points is much broader than the method used by the NBER to define recessions in the US.

    Images: Flickr (licence attribution)

    About The Author

    My original dshort.com website was launched in February 2005 using a domain name based on my real name, Doug Short. I’m a formerly retired first wave boomer with a Ph.D. in English from Duke. Now my website has been acquired byAdvisor Perspectives, where I have been appointed the Vice President of Research.

    My first career was a faculty position at North Carolina State University, where I achieved the rank of Full Professor in 1983. During the early ’80s I got hooked on academic uses of microcomputers for research and instruction. In 1983, I co-directed the Sixth International Conference on Computers and the Humanities. An IBM executive who attended the conference made me a job offer I couldn’t refuse.

    Thus began my new career as a Higher Education Consultant for IBM — an ambassador for Information Technology to major universities around the country. After 12 years with Big Blue, I grew tired of the constant travel and left for a series of IT management positions in the Research Triangle area of North Carolina. I concluded my IT career managing the group responsible for email and research databases at GlaxoSmithKline until my retirement in 2006.

    Contrary to what many visitors assume based on my last name, I’m not a bearish short seller. It’s true that some of my content has been a bit pessimistic in recent years. But I believe this is a result of economic realities and not a personal bias. For the record, my efforts to educate others about bear markets date from November 2007, as this Motley Fool article attests.
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