Uncertainty is admittedly a great concern with economists, but there are also factors that suggest a continued rise. Japan has been in the financial market’s focal point the least in the recent past. In late October, the Bank of Japan surprised the market by expanding its purchases of bonds from the previous 60 to 70,000 billion yen per year to 80 000 billion.
At the beginning of this week published GDP figures confirmed that the Japanese economy, despite the central bank’s massive efforts, has plunged into a recession, no less than the fourth time since in 2008.
After the shockingly weak GDP figure, elected Prime Minister Shinzo Abe decided to dissolve Parliament and to call new elections, which are expected to be implemented in mid-December, and postpone the planned VAT hike in October 2015 to April 2017.
The fact that Japan again has fallen into a recession can largely be explained by the fact that Japanese households consumed less than expected after the VAT increase which took place earlier this year.
Yet, the Japanese stock market has been impressively active during this turbulent period. Since the Japanese stock market turned up in mid-October and has given a raise by impressive 18.5 percent to MSCI index, thus outperforming by far the world’s other major exchanges. As a comparison point, the Swedish stock market during the same period increased by highly prestigious 9.6 percent.
As always, the Japanese stock market is very sensitive to exchange rate trends and some of the stock market rally may of course be related to the yen weakened sharply since mid-October. But the stock market rose only by 10.5 percent in the US, too. So it’s not the whole truth that it is only the currency that changes that drive the Japanese stock market.
For now optimism is high among institutional investors about the Japanese stock market’s future development. According to a survey of those who major bank, Bank of America / Merrill Lynch implemented, Japan is singled out as one of the more interesting stock markets moving forward.
An important factor for the stock market trend becomes the new Parliament, which is expected to be held on December 14. The choice can be seen as a standard measure of support in the population for the economic policies of Prime Minister Shinzo Abe, steering of the country that has become known as “Abenomics”.
Should Abe get renewed support, it would mean a continuation of stimulus policies with a likely fiscal stimulus package soon after the election, and possibly he may also find support for the implementation of some necessary structural reforms – the third step in Abenomics.
In addition, the Bank of Japan is expected to launch additional monetary stimulus now that the country has been plunged into a recession. That means fresh money into the financial markets but also the yen more than likely continue to fall.
Weaker yen gives in its turn export companies extra leverage and it is expected to gain some market share mainly from their Asian competitors. Exports from Japan also rose with the surprisingly strong 9.6 percent in October. Well above analysts’ expectations of a 4.5 percent increase.
For an American investor who does not hedge, admittedly part of a possible stock market recovery will be limited by the yen probably losing in a scenario of further monetary stimulus and continuing deficits in both budget and trade balance.
The major currency movement for the Japanese stock market, however is yen relative to the US dollar, and since the dollar is expected to continue to rise against the Japanese yen, the effect will be even more pronounced for a US investor.
The bottom line may be that it is always unsafe to throw oneself into a market that has been so strong as the Japanese, so maybe one should wait for a possible correction. But there are nevertheless some indications that the Japanese stock market can go stronger than many other stock markets in the near future.