Japan: A look at how stock markets recover

The news is so bad in Japan that the stock market should be making new lows everyday, but the opposite is true.

Business confidence in the Asian nation hit a 34-year low yesterday. According to the FT, "Sentiment among Japanese manufacturers has suffered its sharpest fall in more than three decades, according to the Bank of Japan much-watched Tankan quarterly survey." That goes all the way back to the brutal global recession which was brought on by Arab cuts in the supply of oil.

The Nikkei was up over 5% after the news came out. This might be attributed to the belief that the U.S. car makers will be bailed out, but big auto firms are only a small part of the Japanese economy. After falling sharply for months and being down 45% over the last year, during the last 30 days, the Nikkei is up about 6%.

None of this seems to make any sense unless the move is based on the old adage that stock markets look out six months and trade on where they think the economy will be then. If that is true, Japanese traders believe there will be an economic and earnings recovery beginning in the third quarter.

Japan's economy has fallen more sharply than many during this recession, and it may be the first to recover among the large industrial nations. At least its traders think so.

Douglas A. McIntyre is an editor at 247wallst.com.