The yen’s lockstep relationship with Japan’s stock market may be coming to an end.
After moving in tandem earlier this year as the strengthening yen sent the Topix index into a bear market, the link has started to break down. A gauge of the correlation between the two assets, which reached a high for the year in July, has fallen as much as 29% since then to touch the lowest level since April last month.
Analysts with Nikko Asset Management Co and Goldman Sachs Group say the connection is set to loosen further in the coming year, with stocks poised to rally whether or not the yen continues to weaken.
Business and spending growth in the US from Donald Trump’s policies will propel demand for Japan-made products, which will then spur domestic demand and boost earnings, according to the firms.
“What we saw at the start of Abenomics was a one-to-one relationship between stocks and the currency, with equity prices rising just as much as the yen would fall,” Naoki Kamiyama, chief strategist at Nikko Asset Management in Tokyo, said in an interview. “We’re shifting toward a phase where stocks will move in anticipation of actual volume growth for export products instead of mere price advantages. This is a critical change.”
The correlation between the two assets climbed to a record in September 2015, as Prime Minister Shinzo Abe’s policies weakened the yen and spurred an equities rally.
The close tie, however, began playing to the Topix’s disadvantage early this year as the yen strengthened amid global financial market turmoil and investors’ loss of faith in Abenomics. The Topix plunged as much as 23% and remained pressured as the Topix-yen correlation reached its 2016 high in July.
While the stock gauge rallied back into a bull market last month amid an 8% drop in the yen, the relationship between the two assets has eased. The Topix slid 0.8% yesterday after rising to its highest since January last week. The yen was little changed against the dollar at 113.46.
“One of the potential surprises in 2017 is a decoupling of the stock market from the yen,” Kathy Matsui, chief Japan strategist at Goldman Sachs, wrote in a note released on Friday. “A recovery in consumption and domestic demand overall could eventually cause the link between equities and the yen to break.”
Goldman Sachs raised its 12-month target for the Topix to 1,600 from 1,400. The brokerage sees growth of 1.1% in gross domestic product for fiscal 2017, fuelled by fiscal stimulus and an earnings recovery. It estimates Japan Inc will see 8.6% growth in net profit, based on the yen trading at about 110 per dollar.
Nikko Asset Management lifted its stocks forecast to the same level, saying the Topix will reach 1,600 by September next year.
It expects the yen to trade around 115 to the dollar, not far off from its current level. The two firms join others including Morgan Stanley and Nomura Holdings in predicting the country’s bull run will continue into 2017.
The yen’s ups and downs play a crucial role in earnings for heavyweight exporters including Toyota Motor Corp and banks that serve overseas clients such as Mitsubishi UFJ Financial Group. Ultra-easy central bank policies since Abe took office four years ago helped weaken the yen and send Japan corporate earnings to a record last year.
This year, companies scrambled to downgrade their forecasts as the yen soared to a near three-year high against the dollar, resulting in the worst earnings decline since 2011 in the June quarter.
While the recent weakness in the yen will undoubtedly be a boon to Japanese manufacturers’ export profits, Kamiyama says companies are better positioned to withstand strength in the currency as global demand is expected to pick up, triggered by the US. “Trump may have switched on the confidence button for Americans,” he said. “Volume growth in exports is something that we will see from now in Japan.”

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