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Day three: our Japan 225 trade

The Japan 225 cash market fell 1.5 points shy of my limit yesterday and has since rebounded.

Japan
Source:Bloomberg

Following on from my trade idea yesterday, on the daily chart, yesterday’s candle highlighted indecision by traders and it will be interesting to see how the S&P 500 (US 500 cash on IG’s platform) holds up from here, given the bearish key day reversal seen at the all-time high. The Japan 225 index (Nikkei) doesn’t have the strongest correlation with the US equity markets, so we may see signs of divergence, however a pullback in US stocks will still be a headwind.

USD/JPY continues to oscillate around the 102 level and found sellers overnight due to geo-political tensions stemming from Iraq. However, perhaps the big news that came out in late Asian trade yesterday was an update to Shinzo Abe’s growth strategies. This constitutes the ‘Third Arrow’ of Abenomics.

Most of the initiatives heard by the market are not really going to cause traders to rush out and buy Japanese equities, with the reforms centring on bringing more females into the work force. We also heard strategies around university reforms, privatisation of public facility operations and initiatives around agriculture and tourism.

The two issues I was most interested in were potential changes to Abe’s cabinet and any clarity as to when the Government Pension Investment Fund (GPIF) would change its asset allocation. Recall the GPIF has funds of around $1.4 trillion, so when you know the fund is going to increase its portfolio weighting on Japanese equities to 20% (from 12%), it’s important to know the date. Unfortunately we were only told it would be around the Japanese autumn.

We were also told that corporation tax is to be cut over several years from 36% to below 30% from next fiscal year. This was widely expected, however we still don’t know how the lost revenue will be funded as yet.

All in all, I still favour buying dips in the Japan 225 cash, but am weary given key day reversal in the US equity market and hence I am not keen on chasing the market higher.

Japan 225
IG Charts

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