HOPE FOR THE END OF JAPAN’S LOST DECADES
Nikkei shows remarkable resiliency with index at a record high, Joe Chidley writes.
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.