People have a tendency to extrapolate. When a trend has been sufficiently long-lasting, that tendency to extrapolation becomes very powerful. In 1989, the Nikkei 225 Stock Index peaked at just under 39,000. Now, 25 years later, it sits at around 14,500. Over the last quarter of a century, it has lost nearly two thirds of its value. QUESTION: Is the Japanese equity market riskier, or less risky, today than it was 25 years ago, when it was priced 24,000 index points higher?

David Fuller's view

Here is Tim Price's Letter.

If you are interested in a contrarian perspective, as I certainly am, I hope you will read the rest of Tim Price’s thoughts on this subject.  There are also two historic graphics of considerable interest. 

In the global beauty contest, international investors remain wary of Japan, despite last year’s strong performance.  Japanese investors are particularly cautious.  This is a case of - those who know it best, love it least, because they have been disappointed most often.  Normally, this is an important contrary indicator and Japan is cheap in terms of book value. 

International investors are concerned that the consumption tax introduced last month may have been too much for Japan’s soft economy.  That is certainly a risk but Shinzo Abe’s government can counter it with continued monetary stimulus.  A somewhat softer yen would also help export earnings.  Japan’s energy costs are an additional concern.  This problem would be helped if Japan could restart some of the nuclear reactors without too much political opposition.

We probably know all the bad news for Japan (Topix historical, weekly & daily).  More of the recovery news lies ahead, as Shinzo Abe said yesterday, citing his “three arrows” - temporary fiscal stimulus, monetary easing and structural reform.  Technically, I believe Japan remains in a lengthy medium-term consolidation, in response to last year’s strong gains.