Inflation, deflation, disinflation; expansion and contraction, it can do your head in. Markets are all about balloons and bubbles at different stages of contraction and expansion. The art is to get the best out of the expanding balloon, avoiding the deflating ones along the way.
To the impartial observer the Japanese balloon has been one of the most exciting. From December 1989, when the Nikkei stood at 38,957.44 points, the balloon deflated, big time, falling to an April 2003 low of 7,607.88 points. Since the end of the 1980s the Nikkei has lost over 50 percent of its value at a time when other major economy balloons were going the other way. The Dow inflating 344 percent; the FTSE 155 percent; and the MSCI Asia-Pacific (ex-Japan) 172 percent.
Deflation is a decline in general price levels, often caused by a reduction in the supply of money or credit, and/or contractions in the form of government and consumer spending. The ultimate effect is that there is less demand in the economy. An economy with less demand is hardly likely to feature rising earnings from companies and therefore rising stock values.