Japanese Markets
Why is everyone talking about the Japanese markets? Plus, why their ETFs are becoming increasingly enticing.
In an effort to provide you with the best possible content on current market trends,
in collaboration with and bring you the following article discussing the intriguing Japanese stock market. If you would like to skip around the newsletter, there are the following sections (in order): A Simple History; A Deflating Currency; Why Invest in Japan; and Stocks & Performance.The Japanese Market: A Simple History
In December 2023,
released an article discussing the positive outlook they had on the Japanese stock market.They spent time diving into an essay by Kazuhiro Ueda titled, “Deleveraging and Monetary Policy: Japan Since the 1990s and the United States Since 2007.” Since that newsletter went out, the Japanese stock market began to take off; but there is so much more going on behind the scenes than what many investors know. Before we get into the opportunity of Japan’s potential upside, let’s jump into their past.
Back in the late 80s and early 90s, Japan experienced a similar market crash that the United States experienced in ‘08 when housing went bust. It is important to note that the cause of the Japan crash was not the same as the US crash, but the graphs looked the same. We are just painting the picture for you here, and trust us, the picture gets more interesting the more you look at it. Oh, and here is one more interesting fact for you - Japan’s market has been in a constant state of struggle since the late 80s. I don’t know how aware you are of the US markets since their crash in 2008, but we haven’t been in a struggling market for decades since. Currently, the US market sits at a level that is about double that of height in 2008 before the crash (this took about 15 years to achieve). The Japanese Nikkei 225 hasn’t weathered the storm with the same gusto.
In 1989 the Nikkei reached a peak of ¥38,957 and their economy was flourishing! This value wouldn’t be reached again until recently: February 22, 2024. That’s correct it took Japan 35 years just to get its stock market valuation equal to that of its 1989 high (remember the great country of the USA, DOUBLED its 2008 economy in 15 years).
Why has the Nikkei performed so poorly for so long? While there are multiple explanations, one of the most important is the deflated currency. The folks over at
took an incredibly intricate approach to these historical, yet relevant, issues and have found some deep value in their research.A Deflating Currency
A major factor that has helped to buoy the Japanese equity markets over the past few years has been the weakness in the Japanese Yen (JPY).
After reaching close to the 100 barrier in March 2020, USD/JPY now trades above the 150 handle, marking a sharp decline in a matter of just four years.
The weaker Yen has been triggered by a lack of desire by the Central Bank to raise interest rates, fueled in turn by a lack of domestic inflation. Yet, with other major economies choosing to tighten monetary policy over the past two years, the yield differential between JPY and other peers has made it a popular trade to sell the low-yielding Yen and buy a higher-yielding alternative.
The one area where this hasn’t been a negative is the stock market. A weaker currency makes exports cheaper, helping to boost sales for multinationals. Further, more expensive imports have helped to prevent deflation. This has helped equities to rally, as moderate inflation is preferable for economic growth.
But won’t a stronger Yen with a likely imminent pivot by the Central Bank cause the stock market to crash? We doubt it. Firstly, inflation might be above 2%, but it has been falling. Any rate hikes will be small and certainly won’t be anywhere near as aggressive as seen elsewhere. This should help to not rock the boat with equities.
Second, we’ve been waiting for a pivot to come for over six months. Yet the BoJ is not going to be rushed into anything. Therefore, there’s nothing to stop the Yen remaining weak (and supporting equities) for the rest of 2024.
Finally, it’s not true to state that a tighter monetary policy would derail the stock market rally. We’ve seen in the US how equity markets can push to all-time highs even in an environment when rates are being raised aggressively.
Bringing this all together, a weaker Yen has definitely helped stocks to push higher. Yet even if we see it strengthen off the back of a policy pivot, we don’t see this materially hindering a continued move higher in equities.
Why Invest in Japan
Foreign Investment Opportunities
Japan boasts a robust and well-developed economy. As the fourth-largest economy in the world, the country has a strong industrial base, featuring leading companies in automotive, electronics, and robotics. Corporations such as Toyota, Sony, and Honda have established themselves as global leaders, contributing significantly to Japan's economic prowess. These companies, however, have been around for years and are known as market leaders in their respective categories, but recently they have been encouraging new foreign investment. This includes regulatory reforms and initiatives to improve corporate governance, making it easier for foreign investors to navigate the Japanese market. As Japan continues to open its doors to international capital, it opens up the door for new investors to benefit from the increasing capital pouring in. In fact, the Council for Promotion of Direct Foreign Investment in Japan has created a new “Strategy for Promotion of Direct Foreign Investment in Japan” which began in June 2021. They are striving to double the inward Foreign Direct Investment in stocks to 80 trillion yen by 2030 (https://www.meti.go.jp/english/policy/external_economy/investment/index_FDI_into_Japan.html).
AI & Technical Innovation
Companies like Nvidia and OpenAI have shown how great the craze around AI has been within the past couple of months and Japan has taken note. In fact, within the last 7 days, Japan has decided that it will be taking back the throne as the AI and chip powerhouse we all know it to be. Headlines from multiple reputable sources, including Bloomberg, have published headlines touting Japan’s recent $67 billion investment into becoming a global chip powerhouse. Bloomberg & MSN report that
Tokyo has already shown it means business. In less than three years, Japan has earmarked about ¥4 trillion ($26.7 billion) for revitalizing its semiconductor punching power with Prime Minister Fumio Kishida targeting financial support for the industry to eventually reach ¥10 trillion with private sector support. Among the goals is a tripling of domestically produced chip sales to more than ¥15 trillion by 2030.
This all comes after a $10 billion investment that happened in December of 2023. Japan’s investments aren’t just bets produced with the hope that the market will treat them right, they are declaring their intent to become a world leader in AI. They have a competitive advantage as a country in comparison to places like the US concerning their maneuverability. Bigger countries, like the US, can get gridlocked with investments due to the legislature being caught in government offices. The way American politics have been moving, there is a higher likelihood for this gridlock to happen more often and for longer periods. This is where Japan will be able to take world market share. Their ability to be more light on their feet and adaptable to global changes means quicker delivery, quicker manufacturing, quick design processes, and better customer service. All of the good things that come with a smaller adaptable business. The one place where Japan will miss out in comparison to other chip makers is in the cost department. Many larger companies will have volume discounts offering them cost advantages, but when growth and speed are the names of the game price starts to become less relevant.
Japan’s markets need a new venture to revitalize the country as a whole and they know their biggest opportunity is the new AI & chip craze. Japan's technological innovation is another driving force behind the attractiveness of its stock market as a whole. With a focus on research and development, the country continues to lead in sectors like robotics, artificial intelligence, and clean energy. Investors looking to capitalize on the future of technology may find the Japanese stock market particularly enticing, as it provides exposure to cutting-edge industries that are likely to shape the global economy in the years to come. Multiplatform.AI provided some impressive insight into Japan’s robust AI investments,
Japan’s leadership in AI governance and innovation signifies a dynamic market for AI-driven solutions. As the country pioneers responsible AI practices and collaborations, it sets an example for global markets looking to navigate the complexities of AI implementation and governance. This underscores the growing importance of ethical and responsible AI practices in the business landscape.
Now, if that isn’t making you want to open your wallet to the Japanese market, maybe JP Morgan and BlackRock saying Japan’s market has room to run gives you some inspiration. JP Morgan and BlackRock both cited robust earnings, corporate reform, and a central bank concentrated on escaping deflationary currency as major reasons for high future growth. Now, here is the fun part of the article everyone shows up to read about: a ticker symbol.
dove into one of the ETFs focused on the Japanese markets, and their analysis follows.Stocks and Performance
I built my momentum analysis based on 3 sections:
1. Performance: I like to see stocks trading within 5% of their 1-year high, indicating strong momentum and minimal resistance. Winning stocks also typically exhibit superior performance vs. their peers across multiple timeframes.
2. Trend: I use the 9 and 21 (or 30) exponential moving averages (EMAs) on the daily, and weekly charts to assess the trend’s strength. Strong trends typically involve the EMA9 above EMA21, the stock trading above both EMAs and rising trend lines. I score the chart out of 5, with a score above 4 suggesting a solid trend.
3. Key Levels: Support and resistance levels are critical technical analysis components, serving as indicators for potential market reversals or continuations. My preferred method is to look for previous highs and lows, any levels where the trend has historically changed, and price gaps.
iShares MSCI Japan ETF (EWJ)
PERFORMANCE BENCHMARK
TREND
Weekly chart: STRONG
Daily chart: STRONG
KEY LEVELS
Support:
$63
$57
$48
Resistance:
$70-75
$85
My Take:
Over the past year, the Japanese market has delivered a strong performance, surging by 28%, on par with the top-performing countries globally. Yet, its 3-year return stands modestly at 2%.
The trend transitioned to bullish in early 2023 and has maintained strong momentum with ascending trend lines. A major resistance zone awaits ahead between $70-75, which coincides with the all-time high from Summer 2021. The last time we were at that level, we had a strong rejection and saw a 35% drawdown, a move that took us more than two years to recover. It may take some time and multiple attempts to resolve. Should we succeed, I see a potential run-up to $85 as likely.
On the downside, I have no concerns as long as we trade above $63, the breakout level from early January this year. A drop below this level would point to a shift in momentum and open the door to revisit October 2023's lows at $57.
In summary, I like the strength the Japanese market has shown recently and find it a compelling investment. However, as we hover near all-time highs, the coming weeks and months will help us confirm if this bull market has more room to run.
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