Nikkei Looks up After Abe

Japan’s PM to-be Shinzo Abe and his LDP party won 294 seats in the 480-member lower house of parliament, as outgoing PM Noda’s Democratic Party of Japan lost ¾ of its lawmakers. LDP’s Abe has been synonymous with yen weakness due to the aggressive easing monetary policy he has advocated until inflation rises to +2-3%. Abe’s pro-growth slant is manifested through his calls for increased military spending and higher public works spending–focusing on earthquake and tsunami defense, as well as strengthening the coastguard, Japan’s first line of defense against Chinese efforts to challenge Tokyo’s control of the disputed Senkaku islands.

The Bank of Japan meets on Wednesday night/Thursday morning, but no new easing program is expected until the January 21^st meeting. Yet Abe is pressuring the BoJ to act this week. Either way, he will push for a ministerial joint-statement to double the BoJ’s inflation target to 2%.

Most remarkably, Japan’s inflation rate hovered around the -0.1% to -0.3% territory during most of the last 10 years. A +2% inflation print was seen in four occasions in in 2008 (June – September 2008) and six occasions in 1997, both periods prevailed during high global growth and rising inflation. Thus, if Japan’s best growth rates hardly saw a durable 2% inflation reading recently, then to what extent will the BoJ be forced to ease?

The yen impact of such massive easing has already been discussed here.

Nikkei Technicals: Up 16% in 2012, the Nikkei-225 posts its first annual increase after two consecutive declines, making it the second annual rise in the last six years. The breakout above the two-year trendline resistance coincides with the break of the 200-week MA, occurring two weeks ago. Notably, USD/JPY—an FX pair that’s highly correlated with the Nikkei—is points away from breaking its own 200-WMA for the first time in five years.

Trendlines and moving averages are important for the Nikkei, but oscillators may give us the real clue over future movements. The monthly chart shows stochastics to remain relatively modest compared to previous peaks despite the price being testing the top of its two-year channel. This may suggest further upside momentum, breaking towards an initial target of 10,250. A weekly close above it would paves the way for 11,313 –38% retracement of the decline from the July 2007 high to the March 2009 low.