Japanese Equities: Room to Run

From a behavioral perspective, Japanese equities are showing some very positive signs.

The Nikkei Index has emerged from a six-month-old ascending triangle, projecting a “measured move” to 17,000 or higher. (See attached chart.) Meanwhile, the Japanese yen is breaking down from a similar consolidation, indicating that supply of yen is overcoming demand. These chart developments suggest that “Abenomics” has further to run. Remember,Japan’s quantitative easing program is three times larger than the US version, with no end in sight.

We recently examined the seasonal tendency of Japanese equities back to 1970 when Bloomberg data begins. As in the US, the November-May period is favorable, even during the bear market since 1990. (See attached table.)

All of these factors suggest that Japanese equities will rally in the near term. What about the longer-term prospects? Will massive QE kick start the Japanese economy? Or will it backfire, creating a Keynesian nightmare? From a market perspective, a test of the June 2007 high near Nikkei 18,300 is the next major hurdle. A convincing move above this threshold would indicate an end to Japan’s secular bear market.

© Charter Trust Company

www.chartertrust.com

Read more commentaries by Charter Trust Company