For a large part of 2014 the Japanese stock market has underperformed global developed markets. Predominantly this can be attributed to foreign investors taking profits after a very profitable 2013.
The BoJ has also become more upbeat and traders have pared back expectations around when, or even if the BoJ expand its easing program. So again, the repricing of central bank action has been a headwind for the Japanese market.
It seems the market has decided Japan is once again a good place to invest, with a sharp outperformance of late. In fact, over the last month the Nikkei is the best performing developed market globally, both in JPY and AUDs.
We have now seen five weeks of gains, so while this raises the risk of profit-taking I don’t think this market is over-owned. Good news seems to dominate, ranging from increased buying of domestic stocks from the Government Pension Fund (GPIF), to de-regulation in the real-estate space.
From a valuation perspective the Nikkei trades on a premium to its long-run average, but is trading on a discount of the MSCI world index.
On the data front, the highlight will be national CPI on Thursday. I would actually look more closely at the retail sales number on the same day, with expectations of 2.8% growth. The CPI print is expected to grow at an annualised rate of 3.4%; however we need to remember that the sales tax increase (on April 1) will contribute around 2 percentage points of that, so the underlying number is actually 1.4%.
USD/JPY also looks supported on dips to the 200-day moving average at 101.66, however it’s worth highlighting that the correlation between the Nikkei and USD/JPY has broken down somewhat and USD/JPY seems to be more heavily influenced by moves in the US bond market.
Technically the index looks strong and while I have looked at a buy idea on a pullback to the 38.2% retracement of the June 12 rally and June 18 high, there’s a risk that the index doesn’t pullback here.
More aggressive traders may look to buy at current prices, appeased by the fact the index closed the week above the March high of 15,312.
I feel placing a stop loss below the year’s downtrend and 61.8% retracement of the recent rally is prudent.
Both the RSI and stochastics are elevated on the daily chart, but this simply highlights the strength in recent price action.
I won’t place a profit target for now and would rather watch the trend in the index.