While last night's bloodbath on the Nikkei rattled investors and caused many foreigners to bail out of Japan, the truth is that the run in the Japanese stock market is just getting started -- after 25 years of stagnation.
It's hard to believe that the Japanese stock market peaked in 1989. It was at that time the Japanese stopped buying Rockefeller Center trophy properties in New York and Hawaii and retreated domestically.
At the moment, the Nikkei is 66% below that 1989 all-time peak. Japan hasn't been in a bear market since then: They've been in a bear ice age.
A generation of deflation and warring politicians who couldn't agree on anything left what used to be the second largest economy in the world (recently surpassed by China) in the ditch of the global economy.
With Prime Minister Shinzo Abe's ascension last fall, Japan finally started to believe in itself again. Back in November, the yen was in the 70s and the Nikkei 225 was in the 8,000s. By last month, the yen was over 103 and the Nikkei 225 was almost touching 16,000. We've now sharply reversed with the yen back below 95 and the Nikkei down to the mid 12,000s.
Was it a mirage? I don't think so.
Abe's determination to push through strong structural changes to the Japanese economy that will end deflation and attract foreign capital will get a significant boost next month.That's when they hold the elections which will allow him to gain control of the upper house in Japan. Consensus will actually exist in Japan -- letting Abe actually implement the most drastic of his plans to reengineer Japan.
Haruhiko Kuroda, the Bank of Japan governor, has disappointed investors in the last week with a sense that he wouldn't be as fierce a reformer as first thought.This recent pullback in the stock market and the Japanese currency is likely to encourage all Japanese reformers to double their efforts, likely ensuring the post-July election structural changes to be even stronger than perhaps were anticipated.
The hot money has now pulled out of Japan. But the Nikkei is still up 20% for the year. The S&P 500 is up 13% at this point.
The smartest Japanese leaders -- like Masayoshi Son of SoftBank -- are betting on the reforms sticking. That's partly why he bet on the Sprint (S) deal when the yen was in the 70s. (SoftBank's has tripled since the initial sell-off in the SoftBank stock when the deal was announced last November.)
The smartest hedge fund managers from Dan Loeb to George Soros are also betting that this time is actually different for Japan. You should, too.