Not going to couch it in any niceties, last night the Japanese stock market shit the bed. Nikkei stock index futures were down more than 4%.
The equivalent decline in the S&P 500 would be more than 80 handles.
Although there was some bad news from the Tankan survey, it was not nearly enough to justify the shellacking. The Bank of Japan announced the manufacturing confidence index had dipped to the lowest level since mid-2013, but in the past this sort of news was greeted as reason to buy more stocks on expectations of further BoJ easing.
Obviously something has changed. The Japanese market is no longer interpreting bad economic news in a positive light. For the first time in quite a while, the market is scared the BoJ has run out of bullets. Suddenly there is a real concern the BoJ has done this absurd amount of quantitative easing, but hasn’t managed to reflate the Japanese economy.
Ever since the BoJ made the move to negative rates, the Japanese market has been wobbly. I am not sure if this is a temporary phenomenon, or if the Bank of Japan has hit the point where they lose control of the market.
Longer term picture of JGBs and Nikkei
I am going to make today’s post short and sweet, but I wanted to leave you with a longer term chart of JGB yields and the Nikkei.
After the 1989 top in the Nikkei, Japanese stocks suffered an almost 25 year brutal bear market that took the index from 38,000 to 7,000. During the same period the yield on the 10 year JGB declined from 8% to 0.7%. Along the way there were a couple of false starts, notably in 1998 and 2003.
For these difficult decades, the price of Japanese stocks and the yield on the JGBs were highly positively correlated. As stocks declined, so did yields. When stocks rallied, yields followed.
Until Abeconomics changed that long term relationship. At that point, yields and stocks went in complete opposite directions.
How long can this divergence last? Eventually one of these two asset classes has to revert. I would prefer it be the JGBs, but you never know. As they sing on Sesame Street, one of these things is not like the other. Someone just help me figure out which one…
Thanks for reading and have a great week-end,