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The recent move in the Japanese equity market has had a strong run recently, up 33% in the last year (in local currency terms) against the world index up 19% (in local currency terms) and has left them wondering if something is stirring. We would caution against such sentiments.
In the chart below, you can see that the Japanese equity market has had a very strong run over the last number of years (blue line), but when we adjust for the currency (grey line) it has been a serial under-performer against the rest of the world.
Now, one could think that the Yen could start to strengthen, especially after a long period of depreciation, and hence improve returns from the Japanese equity market. However, the problem here is that the Japanese equity market is very sensitive to the exchange rate and one of the major reasons the equity market has been so strong is that the exchange rate has been so weak. If that reverses, then the equity market will struggle and there is a good chance this will happen if the Bank of Japan pulls back from its loose monetary policy.