Financial Review Corliss Group Online Magazine: Japan's Amazing 25-Year Post-Bubble Drama

It's been quite a while since my last look at secular Japanese market and bond data. We're now just a few months from the 25th anniversary of the Nikkei 225's bubble top in 1989. The latest cyclical rally in the index hit an interim high at the end of December 2013, up 99.6% from its interim low in November of 2011, and a more recent interim high in late September was up 100.5% from that 2011 low. The steroid effect of massive monetary intervention has evolved into an ongoing drama of volatility.

What about Japanese government bonds? The closing yield of the 10-Year bond on the day the Nikkei hit its 2011 interim low was 1.53%. It was cut in half to 0.75% a year later when the Nikkei hit its November 2012 low shortly before the central-bank-driven rally. The yield fell to its 2013 low of 0.44% on April 4, the day that the Bank of Japan disclosed its radical redo of monetary policy. It rebounded to 0.94% on May 29, but it has since been nearly halved to 0.50%. Compare that with the US 10-Year note, which closed Friday at 2.31%.

The Nikkei in Historical Perspective

Here's a quick review of the Nikkei 225, the 10-year bond and inflation over the past three decades.

The table below documents the advances and declines and the elapsed time for the major cycles in the Nikkei.

The Nominal versus Real Nikkei 225

For most major indexes, we expect to see a significant difference between the nominal and real price over a multi-decade timeframe. But Japan's chronic bouts of deflation have kept the two metrics rather tight. Note that I've used a log vertical axis for the index price to better illustrate the relative price changes over time.