Japan: How the Unlikeliest of Bull Markets Came to Be
How one indicator foresaw a comeback in Japan’s stocks while all fundamental signs pointed down
by Nico Isaac
Updated: January 25, 2017
At the end of January, many people in Japan celebrate the festival of the Kogan-ji Temple, where Buddhist priests read over the Sutra of Great Wisdom. The text teaches that wisdom is the best means of attaining enlightenment.
According to mainstream financial wisdom, price trends in financial markets are driven by external factors known as "fundamentals." Positive news events and data cause prices to rise, while negative events prompt sell-offs.
That seems like an enlightening proposition, but the problem is, markets balk at this wisdom all the time. One particularly glaring example occurred in Japan's stock market more than three years ago.
At the time, in late 2012, Japan's Nikkei 225 was in its 23rd year of a gruesome bear market that saw real values disemboweled by 80% and sent prices circling the drain of a 28-year low.
Historians, economists and politicians alike were hard-pressed to find another time when the barrage of bad news pouring out of Japan was so relentless. Topping the list of negative events:
- Ongoing fallout from the March 2011 9.0 earthquake and tsunami, the country's worst natural disaster ever, coined the "next Chernobyl"
- Japan's first trade deficit since 1980
- One of the world's fastest-aging population with lowest birth rates on the planet
- Japan's economy entered official recession territory in the final quarter of 2012
- Japan's debt-to-GDP ratio was the highest in the world
- A wave of financial scandals
- An escalating diplomatic spat with China, Japan's largest trading partner
- The yen was at its highest level against the U.S. dollar since World War II
Needless to say, as far as the mainstream financial pundits were concerned, Japan's stock market was in a death spiral of bearish forces with nowhere to go but down. Here, these news items from the time reset the scene:
"I don't think there's going to be reasons for much of an upturn in the Japanese market. It's hard to recommend people go long on Japan's stocks." (June 6, 2012 CNBC)
"Now is a good time to consider shorting the land of the rising sun." (March 1 Benzinga)
"Don't hold your breath. We are likely to see Godzilla walk out of Tokyo Bay before Japan's economy and stock market rebounds." (February 2, Market Oracle)
These insights were 100% correct. There were no fundamental reasons for Japan's stocks to rise in 2012.
There were, however, several bullish Elliott wave and other technical analysis indicators suggesting just that.
At the forefront of this incredibly unpopular viewpoint was the editor of our Asian-Pacific Financial Forecast, Mark Galasiewski. Here, in his December 2012 Asian-Pacific Financial Forecast, Mark set the Nikkei's bullish stage:
(Note: This analysis came long before Shinzo Abe even loaded his "three arrows" of fiscal stimulus, bond buybacks and rate cuts into his bear-slaying bow -- those came in [YEAR].)
"The Nikkei is approaching the upper line of the declining trend channel that has contained prices actin for the past three years. If the index can rise out of the channel to the 10,000 level, as we expect it will, the rally could have significant upside.
"Long a sleeping giant, Japan will probably surprise the world in 2013."
What happened next?
Well, that sleeping giant indeed bolted awake. In 2013, Japan's Nikkei embarked on a staggering bull run which tripled its value and lifted prices to an 18-year high in August 2016 before leveling off.
In other words, Godzilla walked out of Tokyo Bay.
As for whether Japan's bull run is set to continue...
Each month, our Asian-Pacific Financial Forecast hones in on the major trend underway in Japan’s stock market.