Active Investing in Japan

* Nikkei 225 Stock Average: +5.49 (+0.00%) to 17,289.30, first gain in four sessions both N225 and TOPIX
* Nikkei 225 futures Osaka: +10 (+0.1%) to 17,300, Singapore (SGX) 17,295, Chicago (CME) 7/27 — 17,020
* TOPIX: +6.00 (+0.3%) to 1,705.71; Advancers 1,110 x decliners 519 (unchanged 99), new highs 14 x new lows 313
* Jasdaq: +0.22 (+0.3%) to 76.98
* Yen: gains 0.2% against US dollar at 118.85, +0.4% against euro at 162.40

nikkei 225 japanese stocks

The yen was last up about 0.6% against the US$ at about 118.25 – 118.30. We wouldn’t be surprised to see 117 intra-day, but expect a 118+ close. Even with a quarter-point Bank of Japan [BoJ] rate hike next month, a 0.75% target is way below global rates — meaning a favorable rate gap for carry traders persists — especially as some central banks are still hiking. We don’t expect a significant unwinding of the yen carry trade, in spite of recent global market weakness (ex-China), which is at least partially being blamed on credit concerns meaning there is declining appetite for risk.

yen japanese yen

Nikkei 225 futures trading in Singapore (SGX) opened down 260 points to 16,970, obviously reacting negatively to the LDP losing a majority of upper house seats and the uncertainty over both the future of the Abe administration (PM Shinzo Abe) and the overall economy. Japanese stocks are already oversold but can clearly go lower. Still, absolute Nikkei 225 downside is unlikely to be more than 10% and probably limited to about 5% to 7% (about 1,000 points).


nikkei 225 japan shinzo abe

The 25-day moving average of advances vs. declines among TOPIX 1st Section components stands at about 69, while the Jasdaq is at 73. Typically, when around 75, the market is considered oversold. When approaching the 125 level, the market is in turn becoming overbought. TOPIX 2nd Section stocks are at 78. This has to deal with these stocks having consistently lagged larger caps and receiving renewed interest of late among investors looking for value picks in a neglected universe. As suggested in the prior post, Japanese stocks are likely to be range bound amid political uncertainty over the Abe administration and external pressures such as revaluation of risk stemming from U.S. housing/subprime mortgage weakness [pending credit crunch ... perhaps at least for the PE guys] and less appetite for risk overall.

nikkei 225

As expected, the LDP lost its majority in the upper house. Late reports from NHK show the LDP + Komeito losing 44 x 59 against the DPJ, with only three seats left. (See coverage by Reuters) PM Shinzo Abe says he’s staying despite the “severe” situation.

Japanese stocks are likely to be mostly range bound with no reason for bullishness above 1,800 or 18,000 for the TOPIX and Nikkei 225 Stock Average, respectively. We believe the risk/reward ratio is fairly even, with no more than 10% to either side and more likely a move of about 5%.

A stronger yen has positive implications for ADR investors, but shares of “exporter” stocks will likely be volatile. It is difficult to judge whether any further yen strength will result in repatriation and subsequent shifting to domestic equities. Bank stocks have limited perceived upside due to a tough lending environment and competition.

A Bank of Japan [BoJ] rate hike is still widely expected in August. Still, a post-August follow-on hike might not happen until year end or early ‘08. Thus, in general, expect continued volatility and for the most part, range bound trading. Concerns over the U.S. economy and drops like we’ve seen recently in the U.S. do not bode well for Japanese stocks.

nikkei 225 japan shinzo abe