Nikkei’s Leap is Mere Catch-up

<p>As the yen decline appears to be the path of least resistance in FX, does the soaring Nikkei-225 have the green light to regain the […]</p>

As the yen decline appears to be the path of least resistance in FX, does the soaring Nikkei-225 have the green light to regain the 15,000 level?  The index is up an impressive 27% since January in local currency terms. In GBP and USD terms, it is up 18% and 11% respectively. It also has risen for 9consecutive months, the longest series of advances since 2005/06.

We mentioned last month here and here  that the spectacular advances of the Nikkei over the last 5 months should not necessarily be a warning sign of speculative bubble. Rather than showing a melt-up, the Nikkei may merely be playing catch up.

Here is why:

Nikkei-225 is up 89% from its generational low of October 2008.

Nasdaq is up 153% from its generational low of Mar 2009.

S&P500 is up 133% from its generational low of Mar 2009.

Dow-30 is up 125% from its generational low of Mar 2009.

DAX-30 is up 113% from its generational low of Mar 2009.

FTSE-100 is up 81% from its generational low of Mar 2009.

It is safe to say that out of the Federal Reserve, European Central Bank, Bank of England, Bank of Canada and the Bank of Japan, the latter is the only player with the greatest scale of policy easing ahead of it. Doubling the monetary base from ¥135 trn to ¥270 trn by 2015, and doubling the average maturity of purchased JGBs to seven years from three year will be a stealth blow to the Japanese currency and a positive shock to Japan Inc.

Whether it takes 3 or 6 months for the yen’s decline to pass into the bottom line of corporate Japan, and whether exporters are already hedged against those excessive yen gains over the past 5 years, market expectations will likely further in earnings and margins.14,000 stands as the near term barrier, which coincides with the interim low of June 2006 and above the high of May 2001. As the long as the index avoids a close below 11,820 this  month or 12,550 next month the road to 14,000, appears intact.


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