Stock market news – Nikkei 225: Higher, with a little help from the BoJ?
January 10, 2018 4:26 pm
The Nikkei 225 was on a tear in 2017, as Japan’s economic recovery and the Bank of Japan’s (BoJ) massive stimulus program helped the popular index to reach multi-decade highs, finishing the year 21.5% higher. A continuation of this environment could support the Nikkei even further in 2018, though the pace of the index’s appreciation may depend on other variables as well, such as global risk appetite.
Japan’s economic upswing continued unabated in 2018. The nation’s economic data have not looked this good in years and business sentiment is elevated, leading investors to speculate that Japan’s deflation era may be a thing of the past. An improving economic backdrop tends to be positive for equity markets by itself, but the Nikkei’s surge this past year was also given a helping hand by the BoJ’s ultra-loose monetary policy framework.
Under this framework, the Bank has committed to keeping the yields on longer-dated Japanese bonds fixed near 0%. This policy makes equities appear more attractive than usual, because bonds – which are typically considered a safer investment – do not produce adequate returns to keep investors interested. Not only is the BoJ indirectly making stocks seem more appealing through this mechanism, but it is also actively purchasing massive amounts of Exchange Traded Funds (ETFs), which directly props up equity markets. In fact, through its continued stock purchases, the Bank is now one of the biggest shareholders in many of the Nikkei’s listed companies.
The other variable that likely supported the Nikkei in 2017 was the yen. The currency lost some ground over the past year, which probably helped to make Japanese assets appear even more inviting for international investors, as Japanese equities became cheaper to buy using foreign currencies.
Assuming the current situation continues, with Japan’s economy firing on all cylinders and the BoJ keeping its policy ultra-loose, then Japanese equities are likely to continue posting robust gains. In the scenario that the BoJ keeps its policy framework completely untouched in 2018, the Nikkei could finish the year near its 1991 highs, at 26600. Indeed, despite some recent speculation on the matter, the BoJ does not seem set to leave the “stimulus party” just yet, as inflation remains far away from its 2% target still.
That said, the Bank could potentially cut back on the pace of its ETF purchases during the year, especially if inflation picks up further. As mentioned, Japanese stock markets are already at multi-decade highs, and the BoJ may grow concerned of fueling an asset bubble if it continues to buy ETFs at the current rate, thereby leading it to slow its purchases. The Nikkei could still gain in this scenario, but probably by less, perhaps ending the year near 24750.
In the third (and less likely) scenario, the BoJ becomes satisfied enough with the progress in inflation to either adjust its yield-targeting framework, or scrap it altogether. That would likely lead to a material repricing of Japanese monetary policy developments, which could weigh on the Nikkei. This outcome could see the index finish lower, potentially towards its December lows at 22000. A major unforeseen risk-off event that hurts global risk appetite and strengthens the yen due to its safe-haven status could also produce similar results.
The Nikkei 225 was on a tear in 2017, as Japan’s economic recovery and the Bank of Japan’s (BoJ) massive stimulus program helped the popular index to reach multi-decade highs, finishing the year 21.5% higher. A continuation of this environment could support the Nikkei even further in 2018, though the pace of the index’s appreciation may depend on other variables as well, such as global risk appetite.
Japan’s economic upswing continued unabated in 2018. The nation’s economic data have not looked this good in years and business sentiment is elevated, leading investors to speculate that Japan’s deflation era may be a thing of the past. An improving economic backdrop tends to be positive for equity markets by itself, but the Nikkei’s surge this past year was also given a helping hand by the BoJ’s ultra-loose monetary policy framework.
Under this framework, the Bank has committed to keeping the yields on longer-dated Japanese bonds fixed near 0%. This policy makes equities appear more attractive than usual, because bonds – which are typically considered a safer investment – do not produce adequate returns to keep investors interested. Not only is the BoJ indirectly making stocks seem more appealing through this mechanism, but it is also actively purchasing massive amounts of Exchange Traded Funds (ETFs), which directly props up equity markets. In fact, through its continued stock purchases, the Bank is now one of the biggest shareholders in many of the Nikkei’s listed companies.
The other variable that likely supported the Nikkei in 2017 was the yen. The currency lost some ground over the past year, which probably helped to make Japanese assets appear even more inviting for international investors, as Japanese equities became cheaper to buy using foreign currencies.
Assuming the current situation continues, with Japan’s economy firing on all cylinders and the BoJ keeping its policy ultra-loose, then Japanese equities are likely to continue posting robust gains. In the scenario that the BoJ keeps its policy framework completely untouched in 2018, the Nikkei could finish the year near its 1991 highs, at 26600. Indeed, despite some recent speculation on the matter, the BoJ does not seem set to leave the “stimulus party” just yet, as inflation remains far away from its 2% target still.
That said, the Bank could potentially cut back on the pace of its ETF purchases during the year, especially if inflation picks up further. As mentioned, Japanese stock markets are already at multi-decade highs, and the BoJ may grow concerned of fueling an asset bubble if it continues to buy ETFs at the current rate, thereby leading it to slow its purchases. The Nikkei could still gain in this scenario, but probably by less, perhaps ending the year near 24750.
In the third (and less likely) scenario, the BoJ becomes satisfied enough with the progress in inflation to either adjust its yield-targeting framework, or scrap it altogether. That would likely lead to a material repricing of Japanese monetary policy developments, which could weigh on the Nikkei. This outcome could see the index finish lower, potentially towards its December lows at 22000. A major unforeseen risk-off event that hurts global risk appetite and strengthens the yen due to its safe-haven status could also produce similar results.
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