TOPIX gains on Fed Comments, China

The Japanese equity market rose in January, with the TOPIX (w/dividends) climbing 4.92% on-month and the Nikkei 225 (w/dividends) rising 3.80%. Stocks started the month lower on concerns over an economic slowdown after a major US IT firm downgraded its earnings forecast. However, the market was subsequently bolstered by comments by the Chair of the US Federal Reserve Board that the central bank would assess economic conditions before raising interest rates as well as by news that China would further cut taxes.

Although the IMF downgrading its global economic growth outlook created some headwinds for stocks, the Japanese market continued on an uptrend toward the end of the month on growing expectations that progress would be made in US-China trade talks. Of the 33 Tokyo Stock Exchange sectors, 32 sectors including Glass & Ceramic Products, Pulp & Paper, and Machinery posted gains during the month, while only Retail Trade declined.

Exhibit 1: Major Indices (Last Month and Historic Changes)

Exhibit 1: Major Indices (Last Month and Historic Changes)

Source: Bloomberg, as at 31 January 2019

Exhibit 2: Nikkei 225

Exhibit 2: Nikkei 225

Source: Bloomberg, as at 30 January 2019

Oversold

As we’ve stated previously, the Oct.-Dec. decline in Japanese equities was a complete overreaction by the market. There should be some upside for the next few months around the 22,000 level for the Nikkei 225. With no proof of a recession and steady wage growth in the US, we expect higher returns.

Trade negotiations between the US and China look favourable, as do Chinese equities. If China promises to reduce subsidies at a future date, it may be a good trigger for the long-term growth of the world economy due to structural change, so it’s worth paying close attention. The trade friction will continue for quite a while until China agrees to protect intellectual property rights, end preferential treatment of state enterprises, and abolish certain subsidies.

Davos Men

There were two opposing viewpoints on display from Japan at the Davos summit. On the one hand, you had Japanese CEOs talking about trade tensions as the source of all their woes, showing a high level of pessimism. On the other hand, PM Abe displayed his usual confidence and optimism. We have to agree with Abe here.

As long as global aggregate demand is quite strong, with demand from the US being the most important, the world economy will be fine. Demand from China is in a sense exaggerated. It is mostly parts and machinery and this is cyclical in nature – as well as dictated by government policies. Even with additional tariffs, we still don’t expect negative growth. For now, we don’t expect anything other than the status quo.

US Interest Rates

As we saw in the employment statistics in January, although employment is increasing, wage hikes will be suppressed by about 3%. Although the economy is good, it is far from excessive inflationary pressure. Fed Chairman Powell seems not to be as positive as before. I do not think that it will become a challenge to suddenly reduce assets or suddenly raise interest rates through measures to control prices. We expect the long-term interest rate in the US to be a gentle rise of 3% until the end of the year.

Exhibit 3: Major Market Indices

TOPIX
TOPIX

JGB Yield
JGB Yield

JPY/USD
JPY/USD

Japan Equity Net Purchase from Overseas (JPY bil.)
Japan Equity Net Purchase from Overseas (JPY bil.)

Source: Bloomberg, as at 30 January 2019

Exhibit 4: Major Index Performance, Indicators, and Valuation

Exhibit 4: Major Index Performance, Indicators, and Valuation

Exhibit 4: Major Index Performance, Indicators, and Valuation

Exhibit 4: Major Index Performance, Indicators, and Valuation

Exhibit 4: Major Index Performance, Indicators, and Valuation

Source: Bloomberg, as at 30 January 2019
(e) stands for consensus estimates by Bloomberg.
Turnover and market cap in JPY tril.
Net Purchase (JPY bil.) from Overseas is cumulative monthly.