12th April - The Nikkei awakes
15 April 2013
TECHNICALS:
WEEKLY CHART
The market’s break through the combined resistance of the Prior High ( a Pivot) AT 11390 AND the falling diagonal are an explosive trigger for the bull move.
DAILY CHART
The day chart shows the solidity of the rally, bouncing of diagonal support and the Gap opening on the breakthrough the 12620 Prior High shows great bull impetus.
FUNDAMENTALS:
The Nikkei has for so long been virtually a mirror of the under performing Japanese economy which for almost two decades has experienced deflation and repeated recessions.
Despite the proclamations of successive Japanese Prime ministers of their intention to restore growth and defeat inflation, all had failed to deliver on anything like the scale needed to return Japan to its once envied vibrancy.
That is until the current Prime minister took office. Although he was Prime minster for a brief period earlier and espoused the same policies he is now putting into practice, for several reasons that earlier term in office was seen largely as a disappointment.
So what is different this time?
Since his last term in office the Japanese economy has experienced the additional shock of the Fukushima nuclear disaster caused by a massive earthquake/Tsunami. As the government of the day closed all of Japan’s other nuclear power plants her reliance on imported fuel drove the trade account deeply into deficit.
At the same time the on going Euro zone crisis led traders/investors to buy Yen as a safe haven asset, there-by compounding the trade deficit and making Japan’s industry even more uncompetitive at a time when Chinas economy continued to grow.
But since coming to power for a second time Shinzo Abe has forcefully talked down the Yen and appointed a new governor at the Bank of Japan supportive of his policies
Initially Mr Abe threatened to legislate to force the Bank of Japan, under its previous governor, to adopt more aggressive policies which included a 2.0% inflation target. But with the appointment of Mr Kuroda as the new governor at the BOJ he has a willing ally.
At the first policy meeting under Mr Kuroda monetary policy was aggressively eased. The target is a doubling of the country’s monetary base via the Bank of Japan substantially increasing it’s balance sheet and buying government bonds.
The impact of this policy and commitment to do more if required, is a further weakening of the Yen which has combined with the policy actions and fuelled a strong rally in the Nikkei.
For Japan a weaker Yen means stronger exports and since Japan remains essentially a manufacturing, export led economy that is a very bullish dynamic for the Nikkei.
Whether or not Mr Abe’s policies will succeed where others have failed, only time will tell, but flooding the economy with liquidity on such a large scale will drive down the Yen much further and force people to spend as eventually inflation takes hold and begins to erode the value of savings.
We judge the Nikkei has embarked upon a strong bull run which will see it become an important part of any investors portfolio.
The old historic highs may still be a long way off and may not be seen again for a long time yet; if ever, but that isn’t the point. At last Japan has a leader willing to take decisive action with a supportive Central Bank and that is what is fuelling current sentiment and the price action in the Nikkei.
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