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FT editor Roula Khalaf selects her favourite stories in this weekly newsletter.

On the first full day of trading after the great Tohoku earthquake of 2011, a frightened fund manager recalls, aftershocks shook the office. The world’s largest nuclear power plant in Fukushima had melted down and an explosion had blown the roof off. There was talk of evacuating Tokyo.

Japanese stocks closed 6 percent lower that day.

“But in August 2024,” he says, lamenting Monday’s insane crash that wiped hundreds of billions of dollars from the market, “all it will take is a weak U.S. jobs report and a modest increase in the Bank of Japan’s overnight lending rate to send the Nikkei average down 12 percent in one day. The whole market will trade like a penny stock.”

Tuesday’s session, during which the Nikkei rallied with an equally absurd 10 percent gain, did little to dispel the sense of an emerging market detached from fundamentals and playable only by the most risk-taking speculators. In the space of a week, the broad Topix index plummeted from being one of the best-performing major benchmarks of 2024 to one of the worst, and then back to barely positive territory.

Certainly not the image of a sober but resurgent willingness to invest that Japan wanted to convey to both global investors and millions of skeptical households in Japan. The signage has become increasingly thick, but many can still clearly see the lights that read “Casino.”

So is there a way back now?

In the short term, the mess still needs to be cleaned up, and the process may not even begin as long as a recession in the US and war in the Middle East loom as external threats. On Wednesday, the BoJ’s deputy governor delivered a speech that was perceived by markets as a dovish tone, just a week after the governor signalled the opposite.

The volatile yen, which has been subject to multiple government interventions to bolster it against the dollar since April, had risen far and fast enough by Monday that Japanese authorities could have legitimately intervened to weaken it again. The deputy governor’s comments helped achieve this, but without creating the impression that the BoJ was taking its messages seriously.

When asked whether it is appropriate to continue with Japan, investors are likely to draw three different conclusions.

Those who are cautious will remember that last week revealed the true face of an economy and a stock market that, despite some genuine bright spots and well-considered cosmetic measures, is still pretty ugly. Zombie companies have been allowed to survive for too long. Improvements in corporate governance, capital efficiency, diversity and management professionalisation have come too late and too sparsely. Capital has been woefully misallocated. The promised virtuous cycle of wage increases and sustained reflation has not properly unfolded. Far too many companies should not be listed at all, and the whole thing is underpinned by a shrinking, ageing population.

The more optimistic view is that the last week or two, by provoking precisely the above conclusion, has sensibly flushed out the nervous money without which the Japanese market would always have done better. Long-only funds that were hesitant in Japan while the yen seemed irretrievably weak may now conclude that this is no longer the case. When larger and more stable capital takes a look at the scene, it will jump in precisely because there is still so much wrong in the market – but theoretically capable of improvement.

Unlike the US and major European stock exchanges, where capital inefficiency has been largely punished, Japan still has plenty of it. There are great opportunities for investors who have the time and inclination to find out which ones are close to making the leap to capital efficiency. But that rightly suggests that buying the whole market will always be quite risky. The all-time high the broad Topix hit this year was deceptive because individual stocks moved so unevenly within that level. Caveat emptor: This page is for stock pickers only.

The third, and perhaps most exciting, conclusion is that we are witnessing something extraordinary enough to inspire fear of missing out: the convulsions and shocks that come with Japan’s “normalization” after decades of anomaly. Ultra-loose monetary policy, deflation, a taboo against bankruptcy and a reluctance to consolidate – all of these have characterized Japan in the investment world. Normalization, in one form or another, will be extraordinarily painful and may make Japan look a lot like an emerging market while it is underway. Get used to it.

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