Shinzo Abe and Haruhiko Kuroda had a good thing going. Shame Ben Bernanke had to go and ruin it.
The Japanese prime minister and Bank of Japan chief had been overseeing their stock market’s longest bull run in years, with the Nikkei 225-stock index climbing 80 percent between the day elections were announced last fall and May 22. That’s when Federal Reserve Chairman Bernanke testified before Congress and acknowledged that the central bank’s monetary stimulus program, which gobbles up $85 billion of bonds a month, could slow down in the near future. “If we see continued improvement and we have confidence that that is going to be sustained, then we could—in the next few meetings—we could take a step down in our pace of purchases,” Bernanke said.
Since then, the Nikkei has lost 17 percent, with Japanese and foreign investors alike concerned that Japan’s own ambitious series of asset purchases won’t be enough to jolt the economy out of decades of sluggishness. Abe attempted to defend his “Abenomics” platform and lay out the “third arrow” of his growth strategy in a speech on June 5 in Tokyo, but he got a lukewarm reception; stocks fell and the yen strengthened (bad news for exporters such as Toyota (TM)). In the most recent trading session, the index dipped below 13,000 for the first time since early April.
To get a handle on what’s going on in Japan, load up a simple one-year chart of the Nikkei. You’ll see tremendous growth, with some of the gains erased by the current slide. Enlarge the time frame to five years, though, and you’ll see that the index has come back only to about even with where it was in 2008, just before the global financial crisis hit. Extend the scale yet again, this time to 1980, and you’ll see that stocks today stand at less than a third of their all-time high of 38,915 in December 1989. In the interim, there have been a series of sharp runups—in 1991, 1993, 1996, 1999, and 2005, among others—each of which has turned into a selloff. Today’s investors must decide whether to believe that the current rally is another one of these false dawns, or that Abe and Kuroda really can transform the Japanese economy.