US bear market: Quite like Japan's actually

The United States stock market is widely considered to have recovered much better from its financial crisis a few years ago than the Japanese stock market did in the early 1990s. The reality for investors may be somewhat different.

After sinking to a low in March 2009, the US stock market has staged a strong rally. Despite some volatility in 2011, the Standard & Poor's 500 Index closed on Friday at 1,369.63, more than double its March 2009 low of 676.53. It is now near its highest level since June 2008 and is just 12.5 percent below its peak of 1,565.15 in October 2007.

The chart below shows the performance of the S&P 500 since October 2007 and compares it with the performance of the Nikkei 225 since December 1989, when Japan began its bear market. The chart shows the S&P 500 recovering much better after hitting its trough than the Nikkei 225.

Much of the credit for the better recovery in the US has gone to the Federal Reserve. The US central bank eased monetary policy earlier and more aggressively during the financial crisis than the Bank of Japan did. Ultra-easy monetary policy helped the US economy to recover and stock prices to rise in response.

However, aggressive easing by the Fed also caused the US dollar to depreciate against other currencies, including the Japanese yen, both during its recession as well as in the subsequent recovery.

In contrast, the Japanese yen was appreciating against the US dollar through most of the period from 1990 to 1994 when the Japanese stock market suffered its initial fall and made its attempted recovery.

For a US-based investor measuring his portfolio's performance in US-dollar terms, the appreciating yen mattered.

The above chart shows that if the Nikkei 225 were to be measured in US dollars, its initial recovery from 1992 to 1994 would be seen to be almost as impressive as that of the S&P 500 from 2009 to 2012 so far.

Conversely, for a Japan-based investor measuring his portfolio's performance in yen terms, the S&P 500 today remains far below its peak in 2007 after converting to yen.

The above chart shows that the rally in the US stock market over the past few years looks less impressive when measured in yen. In fact, the overall performance of the S&P 500 since the peak in 2007 looks almost as dreadful as that of the Nikkei 225 from 1990 to 1994.