Capital Economics: Why Japan is not in a bear market

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Following recent speculation over the health of the Japanese stockmarket, Capital Economics argues that the slump in Japanese equities is more of a “substantial correction” than a plunge into a bear market.

The Nikkei 225 dropped 6.35 per cent in last night’s session, marking a fall of over 20 per cent from its previous high in May and entering what is traditionally seen as bear market territory.

The drop in market to 12,445.38 points came after the yen rose to a 10-week high against the dollar, which sparked concerns that Japan’s exporters may suffer a hit to their profits.

However Capital Economics puts the 20 per cent decline in context of the much larger gains already seen in the Nikkei, arguing that the drop in Japanese equities should be labelled a “substantial correction”.

The macroeconomics forecasting consultancy predicted a correction in Japanese equities last week, estimating that the Nikkei would fall well below 13,000 points before achieving a sustained recovery in 2014.

As part of its global market update, Capital Economics attributes the recent movements in the yen and Japanese equities to “increasingly overdone” fears about the outlook for monetary policy in Japan and the US.

The update also highlights reasons behind the reversal in the yen, including the “exaggerated disappointment” that the Bank of Japan failed to ease monetary policy further at its meeting on Tuesday, in response to the recent volatility in the financial markets.

Capital Economics chief global economist Julian Jessop says: “Any suggestions that the Japanese central bank is cooling on the need for a substantial and prolonged easing in monetary policy are certainly wide of the mark.”

He adds that the yen is being boosted by repatriation flows driven by renewed safe haven demand, as markets panic over the possibility of tapering quantitative easing in the US.

The consultancy will be reviewing its key market forecasts in the coming days, but it expects the changes for Japan “will probably not be large”.

A partial recovery in the yen had already been penciled in for the year on the expectation that the eurozone crisis could flare up again, causing investors to use the currency as a safe haven.

Capital Economics also stresses that the bigger picture for the next few years “should be one of renewed yen weakness as the Bank of Japan keeps monetary policy relatively loose”.