Japan’s J Curve

Japan’s J Curve

Summary:Japan’s trade balance and current account are on the upswing, making material strides on the J Curve.One of the largest stakeholders of Japanese stocks has quietly become the Bank of Japan.Monetary policy leaders from the BOJ will be meeting June 15th and 16th to discuss their next move.Japan’s most recent affair with quantitative easing began in October of 2010 following poor economic and inflation growth after the great recession. Since then, Japan’s headline stock index, the Nikkei 225, has rallied nearly 70%; however, Japan’s quantitative easing program has far outpaced stock market growth. Specifically, The Bank of Japan’s bond buying program currently stands at 80 trillion yen per year, 2.28 times the original amount initially suggested in late 2010 of 35 trillion yen.While stocks have responded to the Bank of Japan (BOJ), other sectors of the economy have taken some time to recover, specifically trade. According to some economic trade theory, this should be expected.Economists define a J Curve as the upswing in a country’s current account after a successful devaluation of the local currency. The presumption is that immediately after the devaluation event, imports become more expensive for the local economy. Also in the short term, trade contracts remain little changed. These short term events lead to a slight worsening of the current account balance. This is the trough of the “J” in the below chart, location “Y”.In the long run, the current account will start to rise above previous levels, higher than both location “X” and “Y” on the chart above. The current account rallies due to better international pricing—driven by the more competitive domestic currency. Over...