The charts above show that the polities of Prime Minister Abe and his team clearly made an impact on the economy. Indeed, first-quarter annualized GDP growth has been revised upward to 4.1% from its preliminary reading of 3.5%.
The stock market's initial strong reaction, reflecting the positive case, has presented a challenge for Japanese bulls. As our Weekly Chart shows, the Nikkei rose 80% from November through mid-May. As we wrote two weeks ago, economic change brings market volatility, and that volatility has been high. For the first time since Mr. Abe launched his policies, the markets are testing his resolve.
When the range of potential outcomes from such a radical change in economic policy is great, then the range of forecasts for earnings and markets will also be wide. We think this is the fundamental cause of the price volatility. There is also a technical cause: short-term momentum investors. These investors were attracted by Japan's strong performance in the first five months of 2013, only to be forced to unwind positions when prices fell.
David Fuller's view This issue contains a good summary of Japan's market volatility and its causes, which have unsettled some investors. At such times we should recall the best investment advice of all time: 'Buy low, sell high.'Back to top