The Nikkei 225 index of the Tokyo stock exchange has just closed 2023 in confirmation the best stock exchange in Asia, on the back of a YTD rally above +28%.
All thanks to weakness of the yen, guaranteed by the extremely accommodating monetary policy of the Bank of Japan, led by governor Kazuo Ueda.
Tokyo stock market: 2023 rally thanks to Bank of Japan doubts about inflation
Even in this 2023, the great turning point of the Bank of Japan, in fact, did not take place, with governor Kazuo Ueda, took over from predecessor Haruhiko Kuroda at the beginning of the year, who opted to maintain the status quo, at least on rates.
Result: in Japan the monetary policy based on negative rates continues.
Those that, in the face of galloping inflation, they were sent to the attic by other central banks that had adopted them, primarily by Christine Lagarde’s ECB, and also for quite some time, as well as by the Swiss Nation Bank, Switzerland’s central bank.
Negative rates, however, were still confirmed as a reality in Japan, making the Bank of Japan a white fly among the main central banks of the world.
Inflation not reached in a country known historically, rather, for the phenomenon of deflation? Not exactly.
Inflation has also been trending upwards in Japan. However, he was the same governor of the Bank of Japan Kazuo Ueda to point out that growth is not yet sustainable to the point of endorsing the end of accommodative monetary policy.
And the data proved Ueda right: inflation stood out among the latest macro indicators published the producer price index which, in November, marked the smallest increase since February 2021, equal to +0.3% on an annual basis.
Not only. The figure weakened in November for the eleventh consecutive month.
Also keep an eye on Japan’s inflation as measured by the consumer price index, with the core component which certainly did not give hawkish indications to the central bank.
Own that reticence of Ueda to decisively announce the end of negative rates continued to weaken the yen this year, which priced in the continuation of a decidedly expansionary monetary policy.
Result: the yen suffered a major fall during the year, collapsing a few weeks ago to the lowest value against the dollar since 1990.
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It was thanks to the yen’s slide that the Tokyo stock market continued to rally in 2023 new maximum values since 1989.
The fall in the currency acted as an assist, obviously, especially to the securities of Japanese exporting companies, blocking the Japanese stock rally.
Today, last session of 2023, the Nikkei 225 index of the Tokyo stock exchange closed down 0.22%, at 33,464.17 points.
But YTD, i.e. from the beginning of the year, the price list boasts a 28% increase, which made it the best of all Asian stock exchanges.
Having said that, what is the strong point of the Tokyo stock exchange, i.e. the yencould soon become its Achilles’ heel.
The Japanese stock market, in fact, it is far too dependent on the currency trend which, in turn, is conditioned by the moves of the Bank of Japan. Bank of Japan which could decree the end of monetary policy focused on negative rates and control of the yield curve precisely with the advent of 2024, compared to other central banks, in the front row are Jerome Powell’s Fed and Christine Lagarde’s ECB, ready to cut rates next year.
The divergence would reward the yenstrengthening it, however to the detriment of the Tokyo stock market, which rose, benefiting precisely from the weakness of the currency.
The yen has already recovered ground, jumping about 5% from this year’s low tested on the dollar in November and although Ueda, in the last central bank meeting, recognized the difficulty in exiting the negative rate policy, traders and economists believe that the big step will be taken in the coming months.
Cautious analysis looking to 2024. The ‘underweight’ car made in Japan title
Nomura Holdings chief strategist Naka Matsuzawa has already said to prepare for a decline in the Tokyo stock market of around 5% over the next six months, while analysts from JPMorgan Chase and Saxo Markets they estimate a slowdown in stock growth of between +5% and +10% during 2024, well below this year’s spurt, which saw the Nikkei 225 jump nearly 30%.
“Part of the rise in the Japanese market has been inflated, if not exaggerated, by the currency,” he explained to the Japan Times Matsuzawa di Nomurapointing out how the jump in the dollar-yen relationship allowed the Topix Index to make further progress of 7-8%.
Tony Roberts, manager of Invesco Pacific Fund (UK) – fund that beat 91% of its rivals in the year that is about to end – said in this context that it favors stocks of more competitive Japanese companies, at the same time less sensitive to the yen, such as some chip producers such as Tokyo Electron.
The manager is instead underweight su Toyota, stock soared 46% year-to-date through December 20 – due to the stock’s sensitivity to yen movements.
It must be said that some changes to Japan’s monetary policy, the Bank of Japan has already done it.
With a defined yield curve control policy “ more flexible “, for example, the BoJ went beyond the limits of the previous band of tolerated rate fluctuations, including between -0.50% and +0.50%.
That oscillation range, among other things, had already been widened compared to the previous one, on the day of the encore of the Christmas shock: practically a year ago, with the surprise announcement coming from Kazuo Ueda’s predecessor, the former governor Haruhiko Kuroda.
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The doubt about what the Bank of Japan will do during 2024, and consequently what the yen and the Tokyo stock exchange will do, is therefore more than alive, especially if we consider that the threat of a recession in the United States and the Eurozone, it wasn’t foiled at all. If anything, in some cases and by someone, she was rekindled. And the BoJ’s monetary policy change could strike a hard blow also to the euro and BTPs.