With the S&P (^GSPC) setting a series of new highs and the Dow (^DJI) flirting with 15,000, many U.S. investors have overlooked developments that are arguably even more dramatic: Japan's Nikkei 225 is up more than 50% in the past six months and overnight breached 14,000 for the first time since 2008.
For those unaware, Japan’s rally began late last year when now Prime Minister Shinzo Abe campaigned on a platform to boost economic growth via massive fiscal and monetary stimulus. The gains continued following his election victory and accelerated after Abe appointed Haruhiko Kuroda to run the Bank of Japan; last month, Kuroda announced plans to double the BOJ’s monetary base by the end of 2014.
“You can wonder about political independence of the central bank…but investors, like they bet on the Fed, are saying ‘if the Fed can do it to the U.S. [markets] the Bank of Japan can do it in Japan,’” says Stephen Roach, who notes the BOJ’s quantitative easing plans are roughly double what the Fed is doing in the U.S.
A former non-executive chairman of Morgan Stanley Asia and currently a senior fellow at the Yale School of Management, Roach is “personally very suspicious” that Abe’s agenda – dubbed Abe-nomics – will prove successful. Still, he notes “the market is giving him more than the benefit of the doubt.”
In addition to aggressive monetary and fiscal stimulus, Abe’s self-described “third arrow” is what Roach calls “an unspecified menu of dramatic structural changes” designed to reform Japan’s heavily bureaucratic economy. This will be the most challenging part of Abe’s reforms and also the most important Roach says, citing Japan’s “rapidly aging society” and declining population.
While again expressing skepticism Japan can reverse its two-decade malaise, Roach believes there is a window for Abe's reforms to take hold, which could have major global implications.
“The world has done OK while Japan has stagnated,” he says. “If Japan were to go back to something like a 3% [growth] trend, that would make a big difference to the global economy. [Investors] need to take this as a potentially serious opportunity to improve the pace of global growth.”
As reflected by the "related" links in this article, most observers are focusing on what could potentially go wrong in Japan vs. what could go right. Similarly, many investors are dismissing the Nikkei's revival as being artificially induced. As with America's Fed-induced rally, the skeptics may ultimately prove prescient; in the interim, a lot of money is being made by those willing to ride the QE wave and bet on a more positive outcome.
Regardless of how this plays out, I continue to believe developments in Japan warrant viewers' attention and will prove to be the biggest financial story of 2013 -- possibly beyond.
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- Shinzo Abe
- Bank of Japan