I am very wary to use the word “unprecedented” when describing financial markets. Because no matter how much we’d like to believe that our experiences are unique to our special selves, there are almost always precedents when it comes to market behavior. So I went looking this morning for a similar precedent to Japan’s move over the past year, and it was not hard for me to find.
Here is the 1 year chart of FXI in late 2006 to late 2007, vs. DXJ, the most popular yen-hedged Japan ETF, over the past year:
FXI more than doubled from March 2007 to Oct 2007, an incredible run for the Chinese equity market. There are of course many, many differences between China in 2007 and Japan today, but I bring up the chart because the time frame of this unrelenting run has been quite similar, and likely involves similar investor psychology as well.
While I don’t expect a repeat of the Chinese scenario after Oct. 2007 (mainly because valuations are cheaper in Japan, as I discussed last week), I do think the easy money has been made in Japan. For those curious though, here’s the chart of FXI from Oct 2006 to Oct 2008, with the red circle where I ended the above chart:
A pretty drastic fall.
Some don’t like analogs because each set of circumstances is always different. But human psychology stays the same. Whether Japan is near a longer-term top, or simply in the midst of a correction, I would caution that nothing is unprecedented. So be aware of risks in both directions, and plan accordingly.