A Zak Mir Monthly Top Pick Special
Buy Nikkei: Above 14,000 Targets 18,000
Recommendation Summary:
How to lift the Japanese economy out of a post-crash/bubble implosion in 1990 has been one of the greatest examples of trying to scale the North face of the Eiger for policymakers in the land of the rising sun for pretty much 20 years now.
Unfortunately, despite repeated attempts at effectively implementing Quantitative Easing programs — years before the West embraced this dubious policy, so far nothing and no one has been able to lift this particular Lazarus from its slumber. This observation could also currently be applied to Prime Minister Shinzo “three arrows” Abe, as his “Abenomics” is experiencing its first patch of doubting since being kicked off in the spring of 2013. Sure, while dollar/yen is back above 100 from below 80 and the Nikkei is up from below 9,000 to 14,000 plus now over the past 18 months, we are still seeing poor economic data. The largest monthly trade deficit in 35 years for Japan reported in January is a particularly good example.
We are therefore in a classic “bad news is good news” situation for the proponents of the Long Nikkei argument; I confess to being in this camp and indeed have my own technical target of 18,000 over the next 12-15 months. With weekly oversold stats in the mix too, for my March monthly pick, there would appear to be a decent window to make money on the bull side over the next 1-2 months.
Technicals:
From a chartist’s perspective, the pattern of the Nikkei on its daily chart over the past couple of years is certainly an interesting one. It could be said that after the early 2013 surge, that we are now in the “handle” of what is known in TA land as a “Cup & Handle” formation, albeit a somewhat irregular one.
But what is clear, as far as the near term is concerned, is the way that this market has delivered a classic technical analysis continuation signal in the form of the initial bear trap rebound from below the 200 day moving average, and which importantly, is still rising at 14,486. For those going long here (time of writing at 14,600), I would place a notional stop loss at 14,000 and which should give the buy trade idea enough wiggle room in terms of the traditional volatility around the 200 day line that stock and markets traditionally experience. It may be the case, however, that we have already experienced this traditional hesitation, given the February gap fill rebound on the upside towards 14,308. Ideally now, there will be no price action below this level again ahead of the upside scenario towards 15500 by end of March. Given how sharp the technical set up is here following the bear trap of early Nov, my conviction is high on this trade.
Recent Significant News:
February 21st – Growth in Japan’s factory output likely accelerated in January and core inflation hovered near five-year highs, a Reuters poll showed, underscoring the ongoing economic recovery despite fears that momentum may soon start to fade.
Retail sales probably increased while job conditions held firm, in a sign that an improving labour market and firm demand are driving private consumption, and which accounts for 60 percent of the economy. Weak readings could heighten market expectations that further stimulus will need to be rolled out by the government and the Bank of Japan, who remains upbeat on the economy despite worries about the potential blow from a planned sales tax hike in April and weak demand from emerging economies.
February 18th – Financial stocks in Tokyo were solid gainers in early trading before Japan’s central bank delivers its statement on monetary policy later in the day. Economists don’t expect the Bank of Japan to make any changes in its policy stance at this meeting, but the accompanying press conference by Bank of Japan Governor Haruhiko Kuroda (pictured here) “may still be revealing,” said Capital Economics in a preview on Monday.
The bank is aiming to lift and sustain consumer-price inflation at a rate of 2% through asset purchases that will have roughly doubled the monetary base to ¥270tn by the end of 2014.
But with growth fragile and underlying price pressures weak, Capital Economics said monetary policy will likely “have to be loosened a lot more in 2015, even if some board members are reluctant to commit to this far in advance. This in turn points to further yen weakness and Nikkei strength,” it said. Its year-end 2015 forecast is 120 yen to the dollar, and 18,500 for the Nikkei Average.
The BOJ board later said it would extend by a year two programs that offer to banks cheap loans as a way to juice overall lending and certain key sectors of the economy. The move will “double the scale” of the two programs, known by the snappy names of “Stimulating Bank Lending Facility” and “Growth-Supporting Funding Facility.” This may seem like a minor move, but the extension could have waited until the next policy meeting, since the programs didn’t expire until the end of March. (source: www.marketwatch.com)
February 17th– Japan’s economy grew less than expected at the end of last year, countering forecasts it would see higher spending ahead of a sales tax increase in April.
Gross domestic product rose by 1% on an annualised basis in the three-month period to December, compared with market estimates for a 2.8% expansion. This was due to weaker private consumption and capital spending, as well as lower export figures. However, this was Japan’s fourth straight quarterly expansion.
The latest figures highlight questions about the sustainability of Japan’s economic recovery, and whether the government’s policy of ‘Abenomics’ is working. “The disappointing GDP result is a reflection of the limit of Abenomics,” Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo said. (source: BBC.co.uk)
January 27th – Japan has reported a record annual trade deficit after the weak yen pushed up the cost of energy imports. Its deficit rose to 11.5tn yen ($112bn; £68bn) in 2013 — a 65% jump from a year ago. Japan has seen its energy imports rise in recent years after it shut all of its nuclear reactors in the aftermath of the tsunami and earthquake in 2011. But it is having to pay more for those imports after a series of aggressive policy moves weakened the yen sharply.
The Japanese currency fell more than 20% against the US dollar between January and December last year. The latest trade data showed that while Japan’s imports of Liquefied Natural Gas (LNG) rose 0.2% by volume in 2013 from the previous year, the value of those imports surged nearly 18%.
This is the third year in a row that Japan — traditionally known for the strength of its exports — has reported an annual trade deficit.
Fundamentals:
The Nikkei and the Japanese economy have been subjects close to my heart for over 25 years. This is partly because they continue to provide lessons for us in the West. It is also because they were discussed in my interview for Oxford. I won the argument regarding the effects of a possible crash in Japan — it came in 1990, but not the place as an undergraduate!
The situation now in 2014 is that we are still feeling the effects of the aftermath of the bubble which burst at the beginning of the 1990s, and also, of course, of the spectacular failures by innumerable policy makers there in their attempts to pull the economy out of its “zombie like” trance, and back to normality. Normality in this case would probably be best defined as modest growth and inflation.
On the face of it, the answers to the problems of the economy appear relatively simple: weaken an overvalued currency until things come back to life again. However, it could merely be that as in the case of the recent currency crisis in the emerging markets in January, the fault here actually lies with the way that in order to maintain its massive budget deficit, the U.S. has to pressure the dollar down against other currencies to attract capital flows. Unless or until this structural problem is addressed, it may be that the weakness in the dollar/yen rate and any rallies in the Nikkei — a traditionally tied relationship — may only be intermediate affairs.
However, for the purposes of this monthly pick, it would appear that there is timing on our side. There has been a pause in the effects of the great Abenomics experiment, and with the latest announcement from the Bank of Japan we have clear signals that its intention to deliver inflationary growth will be given fresh impetus. This is partly because the effects of the initial Abenomics drive by the “dynamic” Prime Minister Shinzo Abe who came to power last year are starting to lose their momentum. This is hardly surprising given the way that the Japanese are having to grapple with weak demand from external markets, and this point was underlined by the Finance Ministry reporting on February 20 that Japan ‘s deficit hit Y2.8tn (27.4bn USD) in January, the largest monthly deficit since 1979.
The recommendation to buy the Nikkei is premised on continued easing and solid technical, and possibly means that those getting on-board the Japanese bullet train of leading Japanese stocks in the coming weeks will enjoy the full efforts of the BoJ to maintain the credibility of a policy which comes in a long line of failed attempts over more than two decades to beat a nightmare scenario of economic woes.
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