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Japan may serve as an example of what’s to come for countries facing widening recessions. A man looks at an electronic board displaying market indices and graphs outside a brokerage in Tokyo September 20, 2012. The Nikkei average shed 1.6 percent on Thursday, giving up the previous session's sharp gain, as lackluster Chinese manufacturing data reinforced concerns over flagging demand in Japan's largest trading partner. REUTERS/Yuriko Nakao (JAPAN - Tags: BUSINESS EMPLOYMENT) (YURIKO NAKAO/REUTERS)
Japan may serve as an example of what’s to come for countries facing widening recessions. A man looks at an electronic board displaying market indices and graphs outside a brokerage in Tokyo September 20, 2012. The Nikkei average shed 1.6 percent on Thursday, giving up the previous session's sharp gain, as lackluster Chinese manufacturing data reinforced concerns over flagging demand in Japan's largest trading partner. REUTERS/Yuriko Nakao (JAPAN - Tags: BUSINESS EMPLOYMENT) (YURIKO NAKAO/REUTERS)

Japan optimism returns. But is the rally another false start? Add to ...

Japan has a lot of optimism to live up to this year. Once ignored by investors after years and years (and years) of dashing expectations it has begun to show some encouraging signs. The Nikkei 225 has been on an impressive 25 per cent tear since November.

You can almost hear the tsk-tsks: After all, the Nikkei has seen its share of bounces before. Yet, today the benchmark index is 72 per cent below its peak in 1989 and it has slid 40 per cent since mid-2007. Even with the recent gains, the Nikkei is merely back to where in was in early 1985, meaning buy-and-hold investors have nothing to show for 28 years of patience.

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Is this rally any different from other false starts? Paul Krugman provides one hopeful observation: The new leader of Japan is taking a radically different approach to the economy, providing a lot of stimulus when most other economies in the world are cutting back.

On Friday, Prime Minister Shinzo Abe revealed a new stimulus plan worth more than 20-trillion yen (or about US$226-billion), which he believes will drive economic growth to 2 per cent – after shrinking 0.6 per cent in 2011 – create 200,000 jobs and break the country free from persistent deflation.

Mr. Krugman, who notes that the prime minister has little obvious interest in economic policy, argues that Mr. Abe is doing the right thing: “Abe may be ignoring the conventional wisdom on spending, and bullying the Bank of Japan, for all the wrong reasons – but the fact is that he is actually providing fiscal and monetary stimulus at a time when every other advanced-country government is too much in the thrall of the Very Serious People to do something different. And so far the results have been entirely positive: no spike in interest rates, but a sharp fall in the yen, which is a very good thing for Japan.”

Still, the longer term situation in Japan is still a source of concern. As Mr. Krugman points out, the country still has a low birth rate and an aversion to immigration, a demographic tag-team that will continue to constrain the economy.

And besides that, there is no shortage of investors who are more keen to run from a stock market rebound rather than take a chance and ride it higher.

Follow on Twitter: @dberman_ROB

 
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