Double boost for Japanese stocks

Japanese stocks got a major uplift following the Bank of Japan’s surprise move to ease its monetary policy further last Friday.

Japan stock board
Source: Bloomberg

The decision prompted more weakness in the yen, which in turn fuelled a rally in the local equities.

Another boost for equities came from news of plans by the country’s $1.2 trillion public pension fund to ramp up its investments on stocks and reducing its exposure to domestic bonds.

This is part of a wider plan by the government to make Japanese stocks more attractive and accelerate the country’s economic recovery.

Under the new allocation guidelines, Japanese and foreign stocks will each take up 25% of the pension fund’s holdings, up from 12% each previously.

The allocation to domestic bonds will be reduced from 60% to 35%, while the ratio for overseas bonds will rise from 11% to 15%.

How the market reacted

Last Friday, the Nikkei 225, or Japan 225, rose 4.83% to hit a seven-year high at 16,413.76 points. The investor euphoria also spilled over to the rest of the global markets, with the S&P 500 breaking new ground by closing at an all-time high of 2,018.05 points.

Looking at the weekly chart, the Japanese stock index is on an uptrend line. A pullback will make it an attractive entry opportunity as it looks likely to edge up to break above the 17,000 points psychological level. We could then subsequently see the Nikkei test a resistance area at 17,560 points.

CHART 1 - Click to enlarge

Investors taking a top-down approach can consider the theme of Japanese automaker benefitting from a weaker yen, which will help make their exports more competitive and boost earnings. Companies that will potentially benefit include Mazda, Nissan, Toyota, Suzuki and Mitsubishi.

Japanese markets are closed for today’s holiday, which will make tomorrow’s open interesting to watch as the investors eagerly await the chance to jump on the bandwagon.

USD/JPY

The BoJ’s move has prompted a review of upwards on USD/JPY, especially after the Federal Reserve pulled the plug on QE3 last Thursday. On expectations of a further upside, Nomura has revised its year-end trading target for the pair from 112 to around 115 points.

The 115 points level will be one-to-watch as a possible resistance level, being the previous high in December 2007. According to conventional wisdom, investors should look for dips to buy for a long position.

However, as can be seen in the previous run up in 2013, sizeable retracements may be difficult to come by. Traders may want to look more closely on shorter timeframe charts, 15 minutes to 4 hours, to spot any dips. The strong fundamental move by USD/JPY saw it open at 112.82 with a gap of over 50 pips from the previous close, so investors can also watch out for a potential gap-fill to enter.

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