07/06/2013 at 4:57 pm

On the 23rd of May the Nikkei 225 Stock Average in Tokyo closed 7.3% lower, the biggest daily fall since the Great East Japan Earthquake of 2011. By yesterday the index was down almost 20% from its peak just over a fortnight previously.

At the beginning of this episode there was a lot of speculative attribution of cause. Was weak manufacturing data from China responsible? Or perhaps the Federal Reserve would end its stimulus programme as the US recovery strengthened? Whatever the reason, it was not clear whether the fall would represent a correction for a market which had enjoyed a dizzying bull run, or a kamikaze attack on equity pricing globally.

A couple of weeks later it is tentatively possible to point to the former. The Euro Stoxx 50 and the FTSE 100 are down about 4% and 6% since the 22nd. The S&P 500 has drifted all of 1% lower. And rather closer to Tokyo, the Shanghai Composite has fallen by less than 4%.

Furthermore, if the sharp downward pressure on the Nikkei lately does turn out to be specific to Japan it will reflect market pressures, not fundamental changes to the behaviour of or outlook for the economy. Much the same could be said of the way up of course and the index remains 24% higher for the year to date. But on the very day the tumble began, the Bank of Japan published its Monthly Report for May saying that growth was generally picking up. Since then, there have been positive surprises from a range of indicators including retail sales, industrial production and housing activity.

Moving back west the data has also been surprising. There was a nasty shock from the US on Monday when the ISM index of manufacturing activity indicated a mild contraction, falling to its lowest level since mid-2009. But in Europe the news has been good. In the UK we have seen stronger-than-expected activity levels across the economy – in manufacturing, services and construction – together with a continued gentle increase in house prices and firming of confidence (a connection which will be familiar to readers). In the benighted old eurozone itself PMI data has begun to recover a little more quickly than anticipated as well, and confidence indicators have also been strengthening. Only yesterday, ECB President Draghi told a press conference that the zone would return to growth this year (though the bank is keeping further emergency measures up its sleeve in case the crisis should deepen again).

It is interesting that European stock markets fell in response to Draghi’s remarks. The logic of course was that more emergency stimulus would have been better – though another perspective would be relief at the assessed absence of the requisite emergency. (Markets often respond in disobliging ways to central bank activity.)

It is still too early to write off the risk of contagion from Japan, especially if the correction becomes a full-on collapse. It would be hugely premature to write off the possibility of another emergency for the ECB to contend with. But it is worth observing that we are almost half way through 2013 and about a year from the point at which market confidence really began to recover from the 2011 crash. Japan’s rally has been an impressive spectacle. The avoidance of catastrophe and an end to the recession in Europe could be a major game changer.


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