The Quiet Bull Market Everyone Is Skeptical Of

Although US stock markets are getting all the attention, Japan is quietly knocking up against 20-year highs. In 1995, Nick Leeson bankrupted United Kingdom’s oldest merchant bank with his Nikkei futures trading, but at least he has kept his sense of humor about it. I doubt Barings Bank shareholders find it quite so funny, yet it did give us a thrilling trader-turned-OJ chase through southeast Asia, and a not-half-bad Ewan McGregor movie. And here we are, some two decades later, and Nick is finally almost even on his trade.

Kidding aside, Japan has been a decent little long trade over the past couple of months. Even though we were trading at these levels in 2015, that was when the Yen was 125, as opposed to the much stronger current quote of 112.

This divergence between the Yen and the Nikkei is the story that is going most unnoticed.

Since the start of Abenomics, the Nikkei has been tied to the hip of the Yen. The BoJ floods the system with Yen, this causes the value of the Yen to go down, and Japanese stocks get a bid.

Well, you could argue the BoJ is still flooding their financial system with liquidity, but the Yen is no longer declining. But most importantly, this Yen strength is not causing any stress in Japanese financial markets. In fact, it almost appears like capital has concluded that Japan is cheap, and is flowing into Japan.

This summer I suggested it might be time to Sell US – Buy Japan?. The fact that over the last few months, the Nikkei was able to rally even in the face of Yen strength, has only emboldened my call.

I know everyone thinks Abeconomics will end in disaster. Nothing gets more laughs than hopping on twitter and making some joke about the inevitability of the Japanese collapse from all their money printing. Yet if there is one thing that today’s markets should teach us, it is that anything can happen. Maybe eventually Japan will implode in a fiery inflationary mess.  I won’t deny that one bit. But in the meantime, there is money to be made.