The US economy feels the effect of monetary restrictions, which is not the case in Japan. The BoJ fights deflation, keeping stimuli, which is good news for both GDP and stocks. Let’s discuss that and make a trading plan for Nikkei 225.
Monthly fundamental forecast for Nikkei 225
The Japanese Nikkei 225 outperforms its main foreign counterparts in 2023. It has grown by more than 27% since the beginning of the year. Compare it with the S&P 500 with +17%, let alone the EuroStoxx 50 and Shanghai Composite. Can Japan’s stock market continue its rally? Isn’t it too late to go long?
The main reasons for the Nikkei 225’s success in 2023 are Japan’s strong economic growth, the BoJ’s ultra-loose monetary policy, the undervaluation of the stock index, Warren Buffett’s endorsement, and the Tokyo Exchange’s recommendations to the issuers to improve the quality of shares, leading to record buyout volumes.
The Japanese economy isn’t less performing than the US’ in 2023. It’s expanding the fastest among the 20 largest economies, after the USA and India. Japan doesn’t have to face monetary restrictions, unlike the US. On the contrary, the BoJ keeps monetary stimuli. It continues fighting deflation, while the Fed and most regulators have different goals.
As a result, Japanese 10-year yields are at 0.7%, much lower than 4% in the US or Great Britain. Lower borrowing costs allow local companies to spend more and boost corporate profits. In other words, bond rates aren’t a deterrent like in the USA. If we add a weak yen here, we see why financial conditions have improved, and the Nikkei 225 rallied.
Yen trends and Japan financial conditions
It would be naive to hope for sharp bond rate growth even if Kazuo Ueda has hinted at abandoning yield curve control upon receiving information on inflation and average wage trends by the end of the year. Japan’s government debt is two times its GDP, so the government doesn’t plan to increase its interest payment burden. The process will likely be gradual and slow.
Bloomberg experts may forecast an earlier start of policy normalization, but the BoJ will move at a very slow pace to support economic growth and the stock market.
Forecasts for BoJ policy normalization term
Nikkei 225 is far from updating its historical peaks despite positive trends in 2023. The previous ones were recorded in 1989, so the Japanese stock market has room for growth, and also because non-residents’ increased interest in Japan’s stock market is rapidly growing after Warren Buffett’s endorsement.
Monthly trading plan for Nikkei 225
Nikkei 225 will be able to keep its old trumps, and China’s economic growth will allow it to hope for more. Bullish sentiment will prevail as long as the index is above 32,700. My advice is to buy with targets of 34,100 and 36,000.
Price chart of NI225 in real time mode
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