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How high will the Nikkei go this time? 
(Mon, 16 Mar Pre-Open) 
 
We have repeatedly highlighted the fact that the developed world is struggling to register economic growth. After the global financial crisis of 2008-09, developed economies have not shown a quick recovery. However, the massive money printing by the central banks of these nations has certainly inflated a huge bubble in stock markets. Nowhere is this more evident than the US and Japan.

In the case of the US, there is at least some economic growth to back up corporate profits (however dubious it may be). But what about Japan? Here is an economy on the brink of deflation. The GDP grew by exactly 0% in 2014. The Prime Minister's stimulus measures have failed miserably to revive the economy. There have been no structural reforms. Yet the Nikkei has more than tripled over the last three years. In 2015, the index is up 8.4%. So what explains this stupendous rise in the Japanese stock market?

There are multiple answers. The depreciation of the Yen has allowed exporters to achieve record profits without much of an increase in productivity. Many marginal businesses too have benefitted. Thanks to the central bank's efforts, there is plenty of money chasing stocks in Japan. Also, the Japanese markets are still not as expensive as the US. However, the real fuel that has driven the rally recently was a change in the rules governing pension funds. Last year, these funds were allowed to double their stock holdings.

Now what has all this got to do with the real economy? Not much we believe. Japan continues down a path that is doomed to fail. Its poor demographics put it in a difficult spot. It can be countered with reforms but none are forthcoming. With money printing the only tool being employed, the Japanese economy will continue to struggle but the stock markets could continue on its northward journey. However, like all bubbles, this too will burst. And when it does, to quote Warren Buffett 'A new set of investors will learn some very old lessons'!

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