The Nikkei 225 created a new 15-year high in the Asia session, but the BoJ’s decision to remain on hold and a subsequent rally in the yen took the energy out of the Nikkei’s rally. The BoJ retained its plan to increase the monetary by 80 trillion yen annually, as expected by most market watchers. One member, Kiuchi, proposed increasing the bank’s asset purchases by 45 trillion yen annually but, unsurprisingly, he was voted down.
Even though the market wasn’t really expecting anything from this meeting, the lack urgency and alarm at the bank over Japan’s inflation deficiency sent investors flocking to the yen. As we explained here, the much-anticipated spring wage negotiations appear to have resulted in widespread wage increases across Japan, which reduces the BoJ’s motivation to pump more stimulus into the economy, despite no real inflation growth at the moment.
What’s next for the Nikkei?
The Nikkei is benefiting from a lack of better options for investors. There just aren’t many places for yield seekers to park their money these days, which is forcing capital in equity markets throughout the developed world. This essentially pushes markets like the Nikkei above what may be their true fundamental value. After all, there’s a real risk of deflation in Japan and there are only tentative signs of life in the broader economy. So, does this mean that the house of cards is going to collapse? Not necessarily.
As long as yields throughout the developed world remain depressed, the attractiveness of higher yielding assets like equities isn’t going to go away. A problem may arise when yields begin to rise globally, but only if this isn’t alongside improving fundamentals. And, while yields remain artificially depressed in Japan by massive amounts of QE, the stimulus is helping to bolster investor sentiment. This is far from an ideal grounding for a rally in equities but it’s working.
The Nikkei is approaching an important psychological resistance zone around 20,000; a level which hasn’t been broken in 15 years and even then the index only managed to briefly hold its ground above 20,000. You have to go back to the mid 90’s to see the Nikkei above 20,000 for a meaningful amount of time and back to the early 90’s to see it above this level for more than a few years (inflation was actually in the black during this period…). While we have our reservations about the Nikkei’s fundamentals, we cannot rule out a push above 20,000 as long as there aren’t many other options for investors.