Japanese stocks bounced back Thursday after a two-day respite from the benchmark Nikkei index’s longest rally in 27 years.

For the first time since 1988, the Nikkei Stock Average surged for 12 consecutive days. It coincided with the yen’s slide to its weakest level against the U.S. dollar in more than 12 years. And it’s making a lot of people wonder if Japan is in bubble territory.

While no one factor can explain the winning streak, Nikkei, the media company that owns the stock index, said, “the most significant driving force in these epic market events is a widening gap in the monetary policy stances of the Japanese and U.S. central banks.”

At a time when the U.S. Federal Reserve Bank plans to raise interest rates, effectively ending the quantitative easing program it used to pull the country out of the 2008 fiscal crisis, Japan is going in the opposite direction. The Bank of Japan is already two years into a program of rate cuts and monetary easing that shows no signs of stopping.

When the Nikkei index last experienced a 12-day rally it was about a year away from the 1989 popping of the last Japanese bubble. And people are beginning to worry the same thing is happening now.

While there’s no denying the current stock rally is a result of excess liquidity sloshing around the world economy, the Nikkei Asian Review said this isn’t necessarily a bubble. It points out that the speculative frenzy of the late 1980s hasn’t appeared. In addition, even as Japanese companies post record profits, the average price-earnings ratio of TSE First Section stocks is a relatively modest 17 compared with over 60 at the end of 1989.”

The conventional wisdom expects the BOJ to continue easing, even as the Fed raises rates. This will push the yen lower against the dollar, which should mean bigger profits for Japanese exporters. And that’s the fuel for higher Japanese stocks.

Nikkei said “Japanese stocks and the country’s currency are racing in opposite directions because monetary policies in Japan and the U.S. are also on divergent paths. The Fed wants to respond to the recuperating U.S. economy, while the BOJ is still trying to get the Japanese economy out of its sickbed.”

Still, after such a rally, a bit of caution is called for. Fears of a U.S. stock market correction are beginning to gain traction and money is flowing out of U.S. stocks. Then there’s the economic downturn in China.  If China has a hard landing Japan’s stocks would take a massive hit.

The key question Nikkei asks “is whether Japanese companies have acquired the ability to keep growing were such negative conditions to take hold.”

Let’s just say, it’s a work in progress.

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