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Japanese stocks perform positively in September, but a longer-term upside may be limited, expert says

With the weakening yen and the announcement of higher-than-anticipated US employment figures, the Tokyo Stock Exchange has seen positive movement recently

PUBLISHED : Saturday, 17 September, 2016, 12:18am
UPDATED : Saturday, 17 September, 2016, 12:17am

Movements in the Tokyo Stock Exchange (TSE) have largely been of the positive variety in recent weeks, with the Nikkei climbing above the 17,000 line on September 5 for the first time in around three months.

Analysts say the Nikkei was reacting to weaker-than-expected employment data in the US, which cooled speculation that a rate hike would be announced in September, while the weakening yen also played its part.

A number of analysts are predicting a shot in the arm for the TSE from improved corporate profits for companies here. There is an expectation that consumer demand will surge in the run up to the scheduled increase in the consumption tax – from 8 per cent at present to 10 per cent – in April 2017.

History suggests that prediction is on the money; consumption soared when the tax was lifted from 5 per cent to 8 per cent in April 2014.

But, inevitably, there are consequences. The public rushed out to buy consumer goods ahead of the hike. As soon as the tax rate went into effect, however, consumption plummeted and GDP was negative for three of the following five quarters.

This time around, analysts suggest that the impact on corporate bottom lines may be less severely impacted due to a raft of new launches by Japanese car manufacturers and, more importantly, by the soaring number of foreign tourists visiting Japan.

The number of visitors is on course to surpass the 20 million mark this year, and the target for the Tokyo Olympics is now 40 million.

Naomi Fink, founder and CEO of Europacifica Consulting, agrees that the Niikkei is heavily influenced by global stock market moves, while stimulus measures undertaken by central banks around the world appear to be having a positive impact on global stocks.

In my opinion, stocks have a limited longer-term upside, mostly because Japan is too reliant on reflation as its only credible growth policy
Naomi Fink, Europacifica Consulting

“This makes intuitive sense, given the great influence of foreign investors in the Japanese market,” Fink says.

“Separately, foreign investors appear to favour yen-hedged stock moves, accounting for some of the correlation between dollar-yen and Japanese stocks.”

Fink is less positive on the longer-term outlook. “In my opinion, stocks have a limited longer-term upside, mostly because Japan is too reliant on reflation as its only credible growth policy, while the indebted government has very little room to manoeuvre on fiscal policy,” she says.

“The corporate governance and stewardship codes are hopeful signals, but not enough to sustainably boost total factor productivity, which is the structural problem.”

Elsewhere, there is debate over the value of fixed income products, with Takuji Okubo, managing director and chief economist for Japan Macro Advisors, claiming they are “facing the risk of extinction”.

“Money market products have died and we will see if the government bond market follows suit,” he says. “On the other hand, there is now a market for high-risk corporate bonds as retail and institutional money chases yields.

“For fixed income products, I think the yield curve will test another low at the longer end. “Some negative events, such as sovereign defaults for problems in China, will likely depress the chance that the Fed could hike rates. The yen will appreciate and the market will try to get the Bank of Japan to pull a rabbit out of the hat.”