Japan's Recent Parabolic Market Increases

Times They Are A Changin' Or Are We Repeating The Late 1980s?

Japan’s decision to maintain the “status quo” concluded what was a weeklong central bank plethora of news, all of which more or less was expected. I trust you enjoyed the action; there’s not much on the “economic table” until unemployment numbers hit on July 7th so enjoy your “vacation”. Quite frankly, I’m looking forward to it. Lots to do here at The Ticker EDU as I construct the courses deemed necessary to deliver to you the tools necessary to help you become the best damn investor or trader you can be. It is a “labor of love” and I love doing it; makes me feel alive and happy and trust you’ll be the beneficiary of my efforts. Now let’s take a look at what Japan did overnight and a little history of the Japanese markets ad how they “run business”.

Japan Stays The Course

The Bank of Japan (“BoJ”) maintained its ultra-easy monetary policy on Friday despite stronger-than-expected inflation. The BoJ, under its new leader Ueda, remains dovish. Sure, it’s worried about inflation but willing to wait and see whether demand-driven, durable prices that have risen of late will continue in that direction.

Analysts cast doubt on the view that recent cost-push price rises are transitory. Given inflation has exceeded 2% for 13 straight months together with Japanese investors, the handwriting seems to be on the wall. After all, how long can Ueda expect to keep rates at such low levels essentially forcing investors to “pay the price” to hold Japan’s paper. The BOJ could at least tweak its controversial bond yield curve control policy, right?

Japan’s core consumer inflation hit 3.4% in April as rising raw material costs caused price hikes. Pay hikes were in the mix of the need to raise prices as well. Nonetheless, the BOJ said it expects core consumer inflation to moderate. Ueda did acknowledge that inflation was not moderating however.

At least Ueda expressed concern about the side-effects of its yield control program in part to appease negative public rhetoric. The yen's recent decline could also heighten calls from politicians for the BoJ to tweak as it squeezes households and retailers by pushing up raw material import costs. For Japan's long term bond investors, an end to the Bank of Japan's stifling control of market yields can't come soon enough.

In interviews and media conferences, many domestic life insurers, expected Ueda to tweak or even abandon this policy. While Japanese banks have invested money into overseas bonds, Japanese insurance firms and pension funds have kept their powder dry. Remember, Japan’s central bank is also the largest holder of its national debt. If rates were to increase, the underlying intrinsic principal value would decrease.

What Caused The Nikkei Crash In The Late 1980s

In reviewing the moves currently being made by the BoJ together with the resurgence of the Nikkei to levels not seen in more than 30 years, it’s only appropriate to review what was behind the Nikkei’s meteoric rise and crash. There’s a lot the world learned and continues to learn from this period, unfortunately however “bubbles” still form. Will we ever truly learn?

The Nikkei crash in the late 1980s, also known as the "Japanese asset price bubble" or the "Bubble Economy," was caused by a combination of factors. Here are some key factors that contributed to the crash:

1. Speculative Real Estate and Stock Market Bubble: During the 1980s, Japan experienced an extraordinary economic boom characterized by skyrocketing real estate and stock prices. Speculation in these markets fueled the bubble, with investors expecting prices to continue to rise. The excessive speculation led to extremely inflated asset prices, particularly in Tokyo's prime real estate and the Nikkei stock market.

2. Loose Monetary Policy: To sustain economic growth, the Bank of Japan pursued an expansionary monetary policy keeping interest rates low and providing ample liquidity to financial institutions. This policy encouraged borrowing and fueled the speculative frenzy in the stock and real estate markets.

3. Excessive Bank Lending: Japanese banks, driven by the belief in the perpetuity of rising asset prices, extended loans extensively to all individuals and corporations, often against overvalued assets as collateral. This led to an increase in debt levels and created a fragile financial system.

4. Overvaluation of Stocks and Real Estate: As speculation intensified, stock and real estate prices became increasingly detached from underlying fundamentals. The price-to-earnings ratios of Japanese stocks reached extremely high levels, indicating an overvaluation of companies. Similarly, real estate prices in major cities, particularly Tokyo, became severely inflated.

5. Bursting of the Bubble: In late 1989 and early 1990, sustainability of the inflated asset prices vanished. The BoJ quickly tightened monetary policy, raised interest rates and made it more difficult for borrowers to repay their debts. As the bubble burst, investors rushed to sell their overpriced assets, leading to a sharp decline in stock and real estate prices.

6. Economic Slowdown and Deflation: The collapse of the bubble had a significant impact on Japan's economy. Stock and real estate prices plummeted, consumers' wealth was diminished with consumer spending and business investment coming to an abrupt halt. The Japanese economy entered a prolonged period of economic stagnation, with falling prices, known as deflation, coupled with a banking crisis that only added to the economic woes.

The bubble bursting created long-lasting effects on the Japanese economy, leading to what is often referred to as the "Lost Decade" or even "Lost Score." The Nikkei crash significantly impacted the country's banking system, real estate market, and overall economic growth. These events happened in Japan. They are reflective of subsequent “bubble” related events worldwide. Again, will we ever learn?

Who Really Controls Japan’s Monetary System?

As of September 2021, the Japanese government held a substantial amount of the national debt and some influence over its equity market. The specific figures and conditions may have changed since then but here’s where they stood then:

1. National Debt: The Japanese government is one of the largest holders of its own national debt. The debt is primarily in the form of government bonds, known as Japanese Government Bonds (JGBs). The government issues these types of bonds to finance budget deficits and fund various expenditures. The BoJ plays a large role in the JGB market. Through its monetary policy operations, interest rates are determined. It’s obvious, the BoJ controls Japan’s national debt.

2. Equity Market: While the Japanese government does not directly control the equity market, it often intervenes reducing financial stress to stabilize the market. The Ministry of Finance (MOF) and the Financial Services Agency (FSA) are the regulatory bodies responsible for overseeing the equity market. The government may take measures to support stock prices, such as purchasing shares through special funds or implementing regulations to prevent excessive selling or short-selling. Again, control seems to be a real consequence of their actions.

This weekend takes what the decisions made this week by the central banks together with what then transpired primarily in the currency markets worldwide. I’ve got a lot of work preparing tomorrow’s article then Sunday’s “The Week That Was & What’s Next”. It’s not often one gets the opportunity to teach from current conditions so let’s take advantage of it.

Remember, I’m just a “young” 68 years old and trust me, the lack of sleep this week has caught up to me. Looking forward to the weekend’s work product and being able to teach you better how to be the best damn investor or trader you can possibly be.

Everyone learns at their own pace. If you pick everything up the first time through, great but if not email me at david@thetickeredu.com so we can further help. Again, let me know what you want to learn, I’m all ears.

Had to dig a little for today’s song but finally settled on Shawn Mendes and “Lost in Japan”. Hope you enjoyed and liked all of what was presented this week. I’m going to take a little time for myself and watch the U.S. Open then back to work.