We wrote about the Japanese market just over 10 days ago here – http://www.spreadbetmagazine.com/blog/titan-inv-partners-why-we-are-rebuilding-exposure-to-japan.html and so were somewhat pleased to see the index rally sharply overnight last night. The catalyst for this was comments from The Bank of Japan in which the central bank moved to bolster two bank lending schemes. The effect is to double the funds available to these liquidity operations which had in fact been expected to expire as early as next month.
This is a signal that is very much in sync with the theme of our prior blog, that of the Japanese authorities re-affirming their commitment to reflation under the so called “Abenomics” political regime per our remarks here –
“What we have learnt here at Titan over many years is that investors en bloc are typically always wrong and that “babies do get thrown out with the bath water”. This last week we began building exposure again to the Japanese market towards the lows, reasoning that if the hot money is out, the market is dramatically oversold and the reflation story is still full steam ahead with Japanese officials likely staying resolute in their economic reform plans, that this is a good recipe to be involved with.
From a pure valuation metrics basis Japanese equities are cheaper than US equities, particularly on a price to book basis and as the chart below shows the rout this last month actually took the market back to touch the top of the flag formation breakout last year. Technically with the weekly RSI back at 48, in a bull market this can prove a good level to get long again as each of the circles on the chart illustrate. Our and our client monies is on a resumption of the bull market in Japan.”
The rise in the Nikkei of 3.1% was in fact its best single session since the 2nd of August last year.
Although the Japanese central bank decided not to increase the size of its program of quantitative easing this was interpreted by some commentators as a signal that the BOJ was keen to avoid being seen as monetising debt and deficits. Instead, the emphasis remained on wider economic stimulus.
Central banking semantics aside, what will this additional stimulus mean for the Nikkei over the medium term?
The program of economic stimulus introduced by Prime Minister Shinzo Abe has now been in place for some fourteen months and essentially follows a three pronged approach which combines Fiscal Stimulus, Monetary Easing and Structural Reforms and which are all designed to finally lift the Japanese economy out of the malaise it has endured since the late 1980’s.
Japanese Equity markets have certainly responded favourably to the program over the last fourteen months with the Nikkei rallying from around 10000 at the end of December 2013 to trade a high of 16269.2 by the third of January this year before selling off to a recent low 14000 around where we began to rebuild our exposure to the market. The market certainly seemed to take heart from yesterday’s moves by the BOJ, the subtext of which was “we are determined to see this process through to the finish”.
Reflating Japan is not without its issues of course and a weak yen is one of the fundamental pillars required. Thus far, the weakening of the Yen from around 80 in early 2013 to recent highs near 106 has certainly been supportive of exporters and who of course have traditionally been the bedrock of the Japanese economy. However, one negative for the economy is that since the Tsunami and subsequent disaster at the Fukushima nuclear power plant, Japan has become ever more reliant on energy imports which are typically priced in US$ and is so pressuring the balance of payments figures. Such was the scale of Japans previous economic malaise though that many view the short term pain caused by the energy issues and the currency weakness to be more than offset by the potential longer term gains of the Abenomics experiment.
The jury is still out to some extent on whether Mr Abe’s plans will bear fruit over the longer term but the early signs are encouraging, to us anyway. If we look at a long term chart of the Nikkei we believe that there is a case to say that the long term downtrend that has persisted since 1990 is finally being challenged if not broken entirely. (See chart below).
That view may gain further credence if the Nikkei can establish and sustain itself and move decisively back above 15000 in the near term before testing back to recent horizontal resistance around 15150 and 15394 and then onto longer term barriers up at 16350 and potentially over 18000 by the year end.
We & our clients remain long.
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