Japan Going Godzilla

May 19th Weekly Market Update

Godzillathe latest version of Japan’s King of Monsters, took the top of the box office this past weekend. But Japan’s stock market looks like a giant mutated lizard stomped all over it. One of the worst-performing stock markets in the world this year, Japan’s Nikkei Stock Average is down 13% in yen and 10% measured in dollars. The drop has been enough to push down the forward price-to-earnings ratio for companies in the MSCI Japan index to a rare discount to the U.S. S&P 500 Index.

Yet Japan’s economy is finally growing. First quarter 2014 economic growth in Japan was a strong 5.9% above the prior quarter and 3.0% above the year-ago quarter, according to data released last week. It marked the fifth straight quarter of growth — a streak not exceeded since before the 2008 – 09 global recession. The quarter’s growth was boosted by spending ahead of a consumption tax increase, which could be largely reversed in the second quarter. Nevertheless, the consensus of economists tracked by Bloomberg expects second half gross domestic product (GDP) growth to maintain a 1.5 – 2.0% pace.

Why has growth returned to Japan? Japan has struggled with growth for many years and began to experiment over a decade ago with now widely adopted stimulus measures including a zero interest rate policy and quantitative easing (QE).

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