News about Japan

[Tom MoodyParticipant]

Japan’s stock records lack punch of yen’s fall

Japanese stocks hit new highs on Thursday with a whimper rather than a bang, greatly contrasting the noise around the yen’s recent fall to a 38-year low.
Analysts contacted on Friday about the rise of the 225-issue Nikkei average to an all-time record above 40,000 dispensed with celebratory remarks and got right down to the nitty-gritty, discussing more broadly trends in domestic equities without dwelling on the new high.

“It’s hard to pin the latest rally entirely on fundamentals,” said Thomas Mathews, head of markets for Asia-Pacific at Capital Economics.

“Japanese equities had had a pretty poor run from May until a couple of weeks ago. Doubly so, given how much the yen had weakened over that period. It’s possible they had become a little oversold and the latest rally is just some catch-up,” he added.

The benchmark index hitting 40,913.65 on Thursday was met mainly with matter-of-fact press reports marking the occasion, noting the global rally in stocks and pointing toward interest rates in the United States. Automobile and tech stocks helping to drag the index across the threshold was also mentioned.

In dollar terms, the Nikkei index remains below its all-time highs, as the yen has weakened so dramatically over the past year, while Japanese stocks overall have not been moving much recently. The index is about where it was in April despite the recent rally.

The new record only slightly beat a recent high in March, which had taken out the previous all-time high reached by the Nikkei index on Dec. 29, 1989.

As the yen collapsed to a 38-year low just days before the stock-index record was achieved, the event was seen as broadly significant and greatly concerning, in terms of inflation, monetary policy and economic growth. The return of the Japanese currency to levels not seen since 1986 was thought of as a hit to the credibility of the central bank and as a big problem for the country as a whole.

No such significance was seen in stocks hitting a record, although the strength of equities overall was noted.

Analysts cited a range of factors for the rise in stock prices, including interest rate increases and the anticipation of more hikes, the weakness of the yen and foreign investors taking a greater interest in cheap Japanese stocks.

Improvements in corporate governance, especially as they relate to higher dividends, share buybacks and the guideline issued calling for companies to trade above book value, have been noticed by investors globally and have encouraged the inflow of international money into Japanese stocks.

Global sentiment toward risk also helped nudge higher equity prices, said Norihiro Yamaguchi, senior Japan economist at Oxford Economics.

“I’m skeptical that yen weakness is helping the rally. To me, it is an equity rally leading to yen weakness through increased yen short positions among foreign investors,” he said.

The outlook remains good for companies that may benefit from a weaker currency, and that is seen as good for the market as a whole.

“As Japan’s goods become cheaper for foreign buyers, that will benefit the exporters that make up over half the market capitalization of Japan’s TOPIX index,” a recent BlackRock Investment Institute commentary said.

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