This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
I wrote about the Nikkei back in early June, following a significant correction which saw declines of almost 23% in the face of Ben Bernanke’s initial taper tease. I predicted that we would see the Nikkei eventually bounce back, and, though I was spot on, it wasn’t that difficult to call given that most global indices have benefited from a continuing easy monetary policy from various central banks; most notably the US Federal Reserve.
Nevertheless, the gains seen in the past five months of around 24% are substantial and, as we anchor around the 15,000 level (ironically at the same time that global indices pay a visit to psychological round number metrics), one has to question if things can go even further from here.
It appears that a degree of caution has set in, with the market not quite finding the gas to move through the 15,300 level. Any prolonged move through this would set the Japanese index on a target to make a new stab at the highs last seen in May.
In a bid to target 2% inflation, the three-pronged Abenomics plan has worked to some extent. The promise of Shinzo Abe’s first arrow – the implementation of massive monetary expansion – could be said to have had a weakening effect on the yen more significantly than the actual act itself. The second arrow – investment in public works and renovation of old infrastructure – aims to create jobs and increase salaries.
It may be the third arrow of the plan that the markets have had difficulty getting to grips with – ‘deregulation and creation of sustainable growth’ sounds a little woolly. Japan's government has been encouraging regional investment in order to build ties and secure resources; foreign investment threatens to weaken the yen by boosting the exporters’ profits. Japanese companies socked away roughly $144 billion in cash between June 2012 and June this year according to the Bank of Japan, bringing its total cash pile to $2.24 trillion. Also worth noting, Japanese GDP dropped to 0.5% in Q3, as economic activity continues to contract in 2013. This may be another case of the fundamentals not correlating to the equity market’s extensive gains.
The breakouts witnessed in EUR/JPY and USD/JPY recently probably means that the Bank of Japan’s monetary decision on Thursday will again see heightened attention. Any hints of changes to the current monetary programme will see additional moves in these currency pairs, and therefore the Nikkei.
The USD/JPY currency pair has today found difficulty staying above the 100Y mark. Support is currently being found at the 99.65 level (the 76.4% retracement from the September highs of 100.60 to the lows of 96.56 in early October). Global equity markets are off their all-time highs and seem to be consolidating in advance of more Fed-speak. Gold is not benefiting from safe-haven play (yet), but investor caution and the flow to the yen as a result could well see the currency struggle to weaken.