Japan's Post-Bubble Rallies And The Q3 Rebound In GDP

by: Doug Short

Note from dshort: The preliminary report on Japan's Q3 GDP was released yesterday (EST), coming in at 6.0%, which is a substantial gain over the previous three negative consecutive quarters.

Here is a look at the Nikkei 225 which gives an overview of the cyclical rallies and their duration during Japan's secular bear market, now in its 21st year.

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I've been posting a weekly update of mega-bear market charts (here) that includes Japan's Nikkei 225. In addition, every few months I update an inflation-adjusted overlay of the Nikkei 225 and S&P 500 bubbles.

The table below documents the advances and declines and the elapsed time for the major cycles in the Nikkei.

Nikkei 225 Advances and DeclinesClick to enlarge

Japan's Q3 Real GDP Up 6.0%

The strong recovery in Q3 GDP was an expected rebound following the devastating March earthquake, which sharply reduced private consumption and especially exports. In the preliminary Q3 report, private consumption rose 1.5% quarter-over-quarter, and net exports (exports minus imports) rose a dramatic 13.9% following a -16.5% collapse of Q2.

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The GDP rebound is definitely a move in the right direction, but the next chart illustrates the economic challenges that the country faces. The 6% jump in Q3 GDP still leaves the economy 4.4% below its all-time high of Q1 2008.

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Even with the Q3 rebound, Japan's real GDP is fractionally below the level of Q3 2010. We defintely want to see more of those green bars in the quarters ahead, but a near-term risk is the potential for reduced demand for Japanese exports stemming from Eurozone austerity measures.

Note: The "recessions" highlighted in the third chart above are based on the OECD Composite Leading Indicators Reference Turning Points and Component Series. I use the peak-to-trough version of data (peak month begins the gray, trough month is excluded), which is conveniently available in the FRED repository. As we can readily see, the OECD concept of turning points is much broader than the method used by the NBER to define recessions in the U.S.