Has Japan finally turned the corner?

After more than 20 years of deflation, Japan appears finally to have turned a corner.  The country’s benchmark Nikkei 225 Index has risen for three consecutive months – its longest rally since 1959.  Japan’s new Prime Minister, Shinzo Abe, has unveiled an aggressive policy of forced inflation to bring the country out of its long-term malaise.  Will the turnaround last or will the latest effort to reverse the deflationary tide fail like previous attempts?

Abe has pledged to pull the Japanese economy out of its long-term slump with an unprecedented stimulus plan.  He has also urged the Bank of Japan to loosen monetary policy by making bond purchases and has also suggested the bank take measures to directly boost the stock market.  He has made a 2% inflation target the centerpiece of his plan. 

While the Nikkei still trades some 70 percent below its 1989 peak, it has gained over 32 percent since last year and is currently at a 4-year high.  The Nikkei has a lot of catching up to do to the major indices of other developed nations and, from a technical perspective, looks like it has room to continue its recovery rally.

One reason why Japan’s stock market has had a difficult time rebounding in years past is because of the reluctance of Japanese households, which have 1.5 quadrillion yen in wealth, according to Bloomberg, to return to the stock market.  “Stocks only accounted for 5.8 percent of household assets in September [2012] before the rally took off, according to the latest Bank of Japan figures,” reports Bloomberg Businessweek.  That figure compares with 32.9 percent in the U.S. and 14.3 percent in Europe.  This compares with 23 percent stock ownership in Japan back in 1988.

Japan was the first to enter deflation well before any other nation and will likely be the first to emerge from it.  It may turn out that while the U.S., China and other nations are experiencing their own fight against the deflationary headwinds created by the 120-year Kress cycle in 2014, Japan bucks the trend and leads the way into a new period of long-term inflation.  In the post-2014 world, Japan is worth keeping an eye on as a potential leader.