Nikkei shows re­mark­able re­siliency with in­dex at a record high, Joe Chidley writes.

Calgary Herald - - FINANCIAL POST -

With U.S. stocks con­tin­u­ing their head­line-grab­bing rally, it might be easy to over­look other records be­ing set else­where in the world. But one in par­tic­u­lar is wor­thy of no­tice right now. On Thurs­day, Ja­pan’s Nikkei 225 in­dex closed at nearly 21,000. Un­like the Dow or the S&P 500, that’s far off the Nikkei’s all­time high of al­most 39,000 dur­ing the bub­ble of the 1980s; in many ways, Ja­pan’s econ­omy, and its mar­kets, have yet to re­cover from that bub­ble burst­ing in 1989. But the re­cent Nikkei strength is re­mark­able any­way, not only be­cause it puts the in­dex at its high­est mark in more than 20 years, but also be­cause it seems to be rel­a­tively re­silient.

The Nikkei had bro­ken 20,000 spo­rad­i­cally in June and July of this year, only to slide back amid the fa­mil­iar cool­ers of geopo­lit­i­cal un­cer­tainty, wan eco­nomic data or yen strength — or a com­bi­na­tion of all three. This rally, at least to the chart-watcher, looks dif­fer­ent, in part be­cause it has been swift and sus­tained. Over the past month or so, the in­dex has risen steadily from a sec­ond-half low of 19,275, gain­ing 8.7 per cent since early Septem­ber.

Granted, when it comes to stock mar­kets, mile­stones are more im­por­tant to head­line-writ­ers than they are to ac­tual re­sults. And the big ques­tion, of course, is whether the Nikkei rally can con­tinue. But it al­ready looks like vin­di­ca­tion for Ja­pan-watch­ers who have been point­ing out for a while that Ja­panese stocks look cheap com­pared with their global (and par­tic­u­larly U.S.) coun­ter­parts. And there could be more to the rally than the world cot­ton­ing on to rel­a­tive val­u­a­tions.

One sup­port­ing fac­tor: Abe­nomics, the three-pil­lared eco­nomic re­newal plat­form of Prime Min­is­ter Shinzo Abe, seems to be work­ing, at least sort of. GDP in the sec­ond quar­ter grew by an an­nu­al­ized four per cent, mark­ing the sixth con­sec­u­tive quar­ter of ex­pan­sion. Much of that growth was fu­elled by do­mes­tic de­mand, and it oc­curred de­spite a strong yen that hurt ex­ports through the sum­mer. As well, play­ing against type for an econ­omy that has flirted with de­fla­tion since 1989, the core in­fla­tion in­dex has risen for eight straight months. Unem­ploy­ment is at 2.8 per cent. Fac­tory out­put grew by 2.1 per cent in Au­gust, beat­ing es­ti­mates.

The out­look for cor­po­rate prof­its, mean­while, seems to be sup­port­ing the surge. In the sec­ond quar­ter, 70 per cent of pub­licly listed com­pa­nies recorded profit growth, and more than 100 com­pa­nies have up­graded their earn­ings fore­casts. Among them, Fast Re­tail­ing, best known as the op­er­a­tor of the Uniqlo cloth­ing chain, re­cently said it ex­pects a 13.4-per-cent rise in op­er­at­ing profit this year; it com­prises 8.4 per cent of the Nikkei 225, by the way, mak­ing it the in­dex’s largest com­po­nent.

What’s also re­mark­able about the re­cent rally is that it hasn’t been driven by yen de­val­u­a­tion. Against the green­back, the yen has held pretty much steady since mid-Septem­ber. So maybe this rally will prove more re­silient to cur­rency ap­pre­ci­a­tion than pre­vi­ous ones.

Of course, a lot could de­rail the Nikkei. For one, there’s that lit­tle dust-up with North Korea, which keeps threat­en­ing to bomb the be­jeezus out of the United States or its ter­ri­to­ries, even as Pres­i­dent Don­ald Trump talks about to­tal destruc­tion of North Korea. A “hot” con­flict in Korea would ob­vi­ously be hugely dis­rup­tive to Ja­pan and its econ­omy. Dra­mat­i­cally es­ca­lated ten­sions would likely strengthen the yen, as in­vestors fly to safety. So far, Ja­panese in­vestors seem to be dis­count­ing the sit­u­a­tion get­ting out of hand. But that could change. The next date to watch is Oct. 18, the day China’s 19th Party Congress starts, when some ex­pect North Korea might test an­other mis­sile to protest eco­nomic sanc­tions.

An­other date to watch is Oct. 22 — when Ja­panese vot­ers go to the polls in a snap elec­tion Abe called last month. So far, the prime min­is­ter’s Lib­eral Demo­cratic Party (LDP) holds a com­mand­ing lead in pub­lic opin­ion sur­veys, for what­ever they’re worth. That could change. The deep­en­ing scan­dal that has en­veloped Kobe Steel, which has ad­mit­ted fal­si­fy­ing in­spec­tions data, could be a big deal: Kobe dis­trib­uted po­ten­tially sub-par ma­te­ri­als to au­tomak­ers in Ja­pan and through­out the world. If pub­lic re­sent­ment over yet an­other cor­po­rate scan­dal — re­mem­ber Takata? — crys­tal­lizes into op­po­si­tion to the es­tab­lish­ment LDP, Abe’s for­tunes could soon turn. On the other hand, it could also pro­vide an op­por­tu­nity for the prime min­is­ter to rally com­pa­nies to im­prove cor­po­rate gover­nance — a key plank in Abe­nomics.

Of course, any­one who has watched Ja­panese mar­kets over the past 25 years has to re­sist some hard-learned pes­simism. Af­ter all, if you put $100 into the Nikkei at the start of the mil­len­nium, you would be up only about 10 bucks. In Ja­pan, no doubt, change has been slow. But that doesn’t mean it isn’t hap­pen­ing.


Change has been slow in Ja­pan, but there are signs its for­tunes may be im­prov­ing con­sid­er­ing what ap­pears to be a swift and sus­tained rally of the Nikkei 225 in­dex over the past month or so, says Joe Chidley. The Nikkei 225 closed Thurs­day at nearly...

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