MARKETS SPECTATOR: Land of the rising stocks

The Nikkei 225 is leaving Australia's bull market in its wake but wisened Japanese investors won't necessarily be diving headlong in.

Talk about markets on the move. I thought the S&P/ASX 200 had done well since mid-2012 with gains of around 26 per cent. Think again, with Japan’s Nikkei 225 up a staggering 41 per cent over the same period.

Shinzo Abe, Japan’s prime minister, was relected for a second time last fall on the simple premise that he was going to do everything necessary to spur Japanese inflation, lower the value of the yen and kick-start the economy.

With a two-thirds majority, Abe can basically do what he wants now and is aiming to beat Ben Bernanke at his own game and create massive inflation to once and for all break Japan’s 30-year bout of deflation.

From a valuation perspective, as well, there’s good reason to be cheerful about Japanese stocks. The current price-earnings ratio for the MSCI Japan Index sits just below 14, which is a little higher than what we’re seeing in Europe and about on par with the US. This multiple is far below the 25-year average of around 30 for Japanese stocks.

Yields are telling the same story with the current yield on Japanese shares sitting at 2.2 per cent compared to long running averages of around 1 per cent.


The recent price action in the above chart supports the notion that money is starting to move into Japanese equities as the devaluing of the yen boosts the economic performance of Japan’s exporters.

From a technical perspective, the Nikkei 225 has just broken up through minor resistance (green line) and now looks headed towards the major resistance level around the 12,000-point mark. A successful move through there would really get the bulls excited, targeting an initial move towards the 14,000-point level. The huge increase in volumes recently is also seen as a very encouraging sign.

However, there’s almost definitely a case of ‘once bitten, twice shy’ doing the rounds. Over the years investors in Japan have been bitten many times by the seductiveness of a market showing signs of emerging from its bear-market slumber.

While early indications suggest Abe’s reflationary promises are boosting sentiment and money flows towards Japanese stocks, there’s no way of telling whether this is just another false start. Mind you, one of these days it really will be ‘different this time'.

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