Japan's Post-Bubble Rallies: New Interim Low

Update: Earlier this month Japan's preliminary Q3 GDP come in at 6.0%, which was a substantial gain over the previous three negative consecutive quarters. However, the global financial distress has weighed heavily on the Nikkei 225. Yesterday it hit an interim low, 79% off the all-time high at the end of 1989 and 28% off the interim high of April 2010. The index is currently only 15.7% above its historic low set on March 10, 2009, the day after the US markets hit their Financial Crisis lows.

Here is a look at the Nikkei 225 which gives an overview of the cyclical rallies and their duration during Japan's secular bear market, now in its 21st year.

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

Japan's Q3 Real GDP Up 6.0%

The strong recovery in Q3 GDP was an expected rebound following the devastating March earthquake, which sharply reduced private consumption and especially exports. In the preliminary Q3 report, private consumption rose 1.5% quarter-over-quarter, and net exports (exports minus imports) rose a dramatic 13.9% following a -16.5% collapse of Q2.

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The GDP rebound is definitely a move in the right direction, but the next chart illustrates the economic challenges that the country faces. The 6% jump in Q3 GDP still leaves the economy 4.4% below its all-time high of Q1 2008.

Even with the Q3 rebound, Japan's real GDP is fractionally below the level of Q3 2010. We definitely want to see more of those green bars in the quarters ahead, but a near-term risk is the potential for reduced demand for Japanese exports stemming from eurozone austerity measures.