Eyeballing Japanese Stocks

In late 1989 the Nikkei Index of leading stocks in the Japanese stock market hit a high over 39000 while the S&P 500 Index of United States stocks had climbed to just over 400. Today the Nikkei is near 13000 down 66% from 1989 while the S&P is near 1400 up 350% since 1989. A remarkable divergence in behavior as two of the world's largest markets experienced tidal flows in opposite directions. (The first chart shows both markets monthly since 1987)

One of the interesting things about the long downtrend in the Nikkei was how closely the price movements correlated with the yield of 10 Year US Treasury securities. ( two charts show this relationship, one monthly long term, and one daily to illustrate recent movement)

The yield on 10 yr treasuries Friday was down to 3.59% and could go much lower as Japanese yields did during their decade long experience with deflation. But anyone who believes the economy is only going to have a mild recession rather than a Japanese style deflationary catastrophe has to be watching for signs these yields are nearing their lows, and if so should consider investing in the Nikkei or some other Japanese stocks. Further support of this argument comes from the last chart, of dividend yield on the Nikkei Index, which is at the most attractive levels in a decade both absolutely and relative to Japanese debt securities.

I haven't bought anything yet but I am ready to start tip toeing in to positions.