So investors are bullish on Japan once again. Yet much of the $28-billion (U.S.) in foreign money that has flowed into Japanese stocks since early November is still riding on expectations. The Bank of Japan's commitment on Tuesday to try to achieve 2-per-cent inflation "at the earliest possible date" remains a target only. Meanwhile, there are many reasons why the yen may not depreciate as the consensus view predicts. The latter point is key because the negative correlation between the index and the dollar-yen exchange rate is at its highest in four decades.
Still, for investors who believe that Prime Minister Shinzo Abe can pull his monetary and fiscal stimulus measures off there may be money to be made. The Japanese market is at a 40-per-cent discount to global markets on a price-to-book ratio and cash makes up over a quarter of the market capitalization of Japanese listed companies. The exporters, of course, have already rocketed on the forecast yen weakness.
Shares in Toyota and Sony have gained 75 and 40 per cent more than the Topix since the start of November, when expectations of Mr. Abe's return and the launch of his stimulus package began. Now investors are piling into stocks reflecting the stimulus spending and general reflation hopes, such as iron and steel companies and anything with sizable real estate portfolios. Meanwhile, a rise in government bond yields, which would follow a reflating economy, is helping insurers and the banks (Mitsubishi UFJ, Sumitomo Mitsui and Mizuho).
However, investors will remember that bull markets in Japan tend to run out of steam quickly. Credit Suisse notes that over the past 15 years, Japan has outperformed global markets by 20 per cent six times, but the average rally has lasted just six months. So even if Mr. Abe succeeds in reviving the Japanese economy, investors should keep close to the exit.
Skeptics, meanwhile, should pocket the one-fifth rally in the Topix that Abenomics hype has generated and make a run for it.