Japan shares may surpass May peak on yen, wages

Dealers work under a monitor displaying the Nikkei 225 Stock Average figure, top, and the exchange rate of the yen against the US dollar at a foreign exchange brokerage in Tokyo, Japan, on November 15. Japanese stocks may surpass this year’s high set in May as a stronger US economy weakens the yen and Prime Minister Shinzo Abe’s reflation policy leads to wage increases, according to investors and strategists.

Bloomberg

Tokyo

Japanese stocks may surpass this year’s high set in May as a stronger US economy weakens the yen and Prime Minister Shinzo Abe’s reflation policy leads to wage increases, according to investors and strategists from BNP Paribas Investment Partners to SMBC Nikko Securities.

Japan’s Nikkei 225 Stock Average capped a 7.7% jump last week, the steepest rally in almost four years, after Janet Yellen, the nominee to succeed Ben S Bernanke as Fed chairman, said she will ensure bond-buying isn’t ended until she sees a robust recovery. A 3.1% gain would take the equity gauge past a 5 1/2-year high reached May 22. The yen dropped past 100 versus the dollar last week for the first time in two months.

“US quantitative easing will be reduced eventually, but that won’t have much of a negative impact because it happens on the back of the strong economic recovery,” said Gentoku Kiyokawa, Tokyo-based head of the Japanese investment management department at BNP Paribas. “Japanese stocks will keep climbing toward their May high and pass that level by the end of this year.”

Japanese equities surged the most among developed markets in 2013 as policy makers at home and in the US bolstered growth with unprecedented stimulus measures. The rally petered out last month as investors weighed the impact of a sales-tax increase on the domestic economy and stronger US data that signalled the Fed may pare asset purchases sooner. BNP Paribas’ bullishness contrasts with Saison Asset Management and Sompo Japan Nipponkoa Asset Management, which say Japanese stocks are now rising too far, too fast.

Pioneer Corp led gains on the Nikkei 225 last week, surging 20% as the maker of car stereos posted an operating profit of ¥569mn ($5.7mn) for the six months ended September. Analysts had expected a ¥2.5bn loss, according to estimates compiled by Bloomberg. Fast Retailing Co, Asia’s biggest apparel chain and the stock with the heaviest Nikkei 225 weighting, jumped 16%.

The broader Topix index climbed 5.3% in the five days through November 15, with brokerages leading an advance by all 33 of the gauge’s industry groups. The Standard & Poor’s Index rose 1.6% in the US on the week, gaining to an all-time high after Yellen said the economy and labour market are performing “far short of their potential” and must improve before the central bank can begin reducing monetary stimulus.

As well as watching the Fed, investors in Japan are weighing whether Prime Minister Abe will succeed with the so-called third arrow of his programme dubbed Abenomics. The strategy, which has so far relied on increased government spending and a doubling of monthly bond buying by the central bank to more than ¥7tn, helped spur the Nikkei 225’s 46% advance this year.

The Bank of Japan, which holds a two-day meeting this week, has pledged to achieve 2% inflation in two years. Large Japanese companies will boost winter bonuses by 5.79% this year, the most since 1990, according to the preliminary results of a survey released on November 13 by the Keidanren business lobby group.

“Catalysts for Japanese stocks are how convinced people will be about further monetary easing by the BoJ and wage increases,” Ryota Sakagami, chief strategist at SMBC Nikko Securities in Tokyo, wrote in a note on November 15. “They are likely to happen sooner or later. Now Japanese shares are rising on back of the stable global economy, the market might as well start pricing in those catalysts earlier.”

Sakagami expects the Topix to rise to 1,350 at the end of this year, 9% higher than its November 15 close and a level unseen since June 2008.

The rally in Japanese stocks will reverse if optimism about the Fed’s policy starts fading, said Tetsuo Seshimo, a Tokyo- based portfolio manager at Saison Asset Management, which oversees about ¥78bn. The Nikkei 225 plunged 20% after Bernanke in May mentioned the possibility of tapering.

While pledging her support for stimulus, Yellen also reassured US lawmakers last week that she does not see the era of low interest rates and quantitative easing continuing indefinitely.

“The picture is exactly the same this time, and the market will collapse if there’s talk about the Fed’s tightening,” Seshimo said. “The current rally has been solely based on US monetary easing. That worries me.”

Prices for Japanese equities already reflect the US economic recovery and Yellen’s support for longer stimulus, leaving them vulnerable to declines, said Goya Nakao, a senior investment manager at Sompo Japan Nipponkoa Asset.

“Cherry-picking in the share market won’t last long,” Nakao said by phone on November 15. “Stocks won’t be able to avoid having a correction in the near term and the Nikkei will go back to a range between 14,000 and 15,000.”

The Nikkei 225 last week climbed above 15,000 for the first time since May and closed on November 15 at 15,165.92.

Foreign investors are more optimistic, adding Japanese stock positions in the week through November 8 for the fourth increase in five weeks. They’ve sunk $111.3bn into the market this year, Finance Ministry data show.

Japan’s equities are benefiting from a declining yen, with the nation’s currency capping its third consecutive weekly drop against the greenback and trading past 100 per dollar on November 14 for the first time since September 11.