Momentum in Japan : The Exception that Proves the Rule

Momentum strategies deliver positive profits in a variety of market and asset classes with one glaring exception - Japan. The failure of momentum in Japan has led some to call into question momentum's viability, suggesting that perhaps momentum's success elsewhere may be the result of data mining. We reject that interpretation. We argue that because value and momentum strategies are strongly negatively correlated, they need to be studied as a system. We show that the results in Japan are perfectly consistent with value and momentum working everywhere at similar levels and are entirely within the range of statistical noise. Viewed as a system, we show momentum strategies are actually a success in Japan. In sum, we find the Japanese momentum results supportive, not contrary, to the idea that momentum is a strong ex ante efficacious strategy around the world. Put differently, the Japanese momentum results are the exception that proves the rule