After Japan's stock market soared 80 percent over the course of six months, it hit a roadblock. The rapid climb of the Nikkei 225 index, the market's benchmark, came to an abrupt end on May 22. Over the next three weeks, the market plunged 20 percent -- the definition of a bear market.
However, since June 13, the day it entered bear territory, the Nikkei has bounced back 13 percent. The quick turnaround has led many to ask if this market correction is a buying opportunity, or merely a head fake as the Japanese market returns to the doldrums it's been sitting in for the past two decades.
"The historical template for Japan over the last 20 years has been, the government announces measures, markets do well, and six months later we're back where we started," says Christopher Dodson, Japan capital markets specialist at Auerbach Grayson, a New York broker that provides access to international markets. "That history was the prime reason for the severity of the dive."
The Japanese market began its rally in November with the dissolution of Japan's parliament, which paved the way for the election Prime Minister Shinzo Abe. But it was Abe's package of policies to grow Japan's moribund economy that really sent stocks soaring.
The prime minister proposed a three-sided plan to spark economic growth. Nicknamed "Abenomics," the plan consists of loosening monetary policy, increasing public works spending and making structural reforms throughout the economy. The monetary stimulus aims to end the problem of deflation, or falling prices, by decreasing interest rates to ultimately produce 2 percent inflation within the next two years. Finally, the structural reforms include tax cuts and an easing of regulations.
So far, the monetary stimulus has had the biggest effect. From November through May, the yen declined in value against the dollar by 30 percent, which is good for Japanese exporters because it raises the value of their overseas earnings and helps make their products less expensive abroad. After a short recovery, the yen is down 25 percent as of July 3.
"Monetary policy by itself is not enough," says Paul Attwood, portfolio manager of the Huntington International Equity fund (HIETX) and Huntington Global Select Markets fund (HGSIX). He says corporate tax rates must be lowered and some regulations eliminated in order to see sustainable economic growth. Even so, the country is his top pick among international markets, and his funds have a 20 percent stake in Japan. Attwood says the stocks are attractively valued and the downside is limited, so he's looking to buy more. He suggests U.S. investors put 5 percent of their portfolios in Japan.
The trigger for the Nikkei's tumble was the U.S. Federal Reserve. On May 22, Fed Chairman Ben Bernanke said if the U.S. economy continued to improve, the central bank could begin to wind down its policy of buying Treasury bonds, known as quantitative easing. Fears that ending the policy would slow down the U.S. economy sparked a worldwide sell off in stocks. The same day, China, Japan's second-largest trading partner, released poor economic news. That one-two punch sent the Nikkei reeling.
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