May 29, 2022

Nikkei Continues Rallying As Japan’s Exports Plunge 49%

Bad News Discounted?

One of the hardest concepts for investors to grasp is the ability of markets to discount bad news.  As the news mounts daily about the Japanese economic collapse, the Nikkei 225 continues to rise.   As pointed out previously (see Can The Economic News From Japan Possibly Get Worse?) the Nikkei has refused to penetrate the lows reached in 2003 and at this point is up almost 22% from the March lows.

The ability of a market to rally in the face of horrific economic news is usually a sign that the worst has been discounted.  The argument could be made that informed stockholders have already done their selling since mid 2008 and at this point are looking down the road a year or so for a recovery in business conditions.  Consider also that the Nikkei is back to the levels it was at in the mid 1980’s before the world started its grand experiment with unlimited credit creation.

Time will tell whether or not the Japanese economy is due for some type of recovery.  Bear market rallies of 20% or more are not uncommon after huge declines.  As long as the Nikkei can stay above the 7,000 level, perhaps the worst has been seen.

Long Term Factors To Consider

As previously discussed (See Nikkei – Black Hole or Buying Opportunity?), some long term factors to consider are as follows:

-the Nikkei is already off 80% from its December 1989 high and has perhaps discounted the worst that can happen.

-a multi year double bottom may be forming at current price levels.

-the most fundamentally bullish factor may be that the Japanese government has reached the limits on its borrowing capacity, thus precluding the continuation of costly and ineffective stimulus plans (see Japan’s failed strategy). With the government no longer able to subsidize failed enterprises, free market forces can now accomplish the restructuring necessary to rebuild Japan’s economy.

Can The Economic News From Japan Possibly Get Worse?

Japan’s Exports Plunge By 45% In January

Six months ago, no one in his right mind would have predicted a 45% decline in Japan’s exports.  The drop in exports has no comparable statistics, as Bloomberg reports.

Feb. 25 (Bloomberg) — Japan’s exports plunged 45.7 percent in January from a year earlier, resulting in a record trade deficit, as recessions in the U.S. and Europe smothered demand for the country’s cars and electronics.

The shortfall widened to 952.6 billion yen ($9.9 billion), the biggest since 1980, the earliest year for which there is comparable data, the Finance Ministry said today in Tokyo. The drop in shipments abroad eclipsed a record 35 percent decline set the previous month.

Exports to the U.S. tumbled an unprecedented 52.9 percent from a year earlier, and shipments to Asia and Europe also posted the largest-ever declines as the global recession deepened. The collapse is likely to force Japanese companies to keep firing workers and closing factories, worsening an economy that shrank the most in 34 years last quarter.

“The pressure on companies to cut jobs and investment is rising and that will make the recession deep and protracted,” said Yasuhide Yajima, a senior economist at NLI Research Institute in Tokyo.

Shipments to Europe slid 47.4 percent in January from a year earlier, the Finance Ministry said. Exports to China fell 45.1 percent and those to Asia dropped 46.7 percent.

Central bank Governor Masaaki Shirakawa said last week that the economy will remain in a “severe” state next quarter and companies will struggle to obtain financing as investors shun risk. The bank, which lowered the key overnight lending rate to 0.1 percent in December, last week said it will buy corporate bonds for the first time to stem the credit squeeze.

The Nikkei Puzzle

With astonishingly horrible economic news coming out of Japan almost daily, one would expect that the Nikkei would be crashing below its 2003 low – see Nikkei – Black Hole or Buying Opportunity. Is it possible that we are looking at a classic “buy on the bad news” opportunity?   At this point, one could take the position that the Nikkei’s refusal to sell lower means that the present bad news has been fully discounted.

Contrary Opinion Time?

The fact that the Nikkei refuses to hit new lows may indicate that the world economy will improve going forward.   How could it get much worse?  If we extrapolate the present rate of decline for Japanese exports, they would drop to virtually zero within six months!   Is the world’s second largest economy really going to ground to a dead stop?

This may turn out to be a classic (long term) “buy on the bad news” opportunity for the Nikkei, as long as the 7000 level can hold.