Japan Stock Rally Fate Found in Watching Won: Chart of the Day

The best gauge for determining how far Japan’s resurgent stock rally has to run may come from watching the yen’s performance against South Korea’s won.

The CHART OF THE DAY tracks the relationship between Japanese shares and the won’s level versus the yen. Deutsche Bank AG forecasts the won will rise to 0.108 yen by year-end as the U.S. recovers, spurring an 8 percent rally in the Topix index to above 1,400 for the first time since June 2008. The lower panel shows Japan’s U.S. exports alongside annual revenue at Sony Corp. and Toshiba Corp. A stronger won makes exports of Korean rivals such as Samsung Electronics Co. less competitive.

“The won-yen rate and the Topix move together to such a large extent because both markets tend to respond to risk sentiment the same way,” said Taisuke Tanaka, chief foreign-exchange strategist and head of fixed-income research at Deutsche Bank in Tokyo. “There is an underlying perception in the market that Korea and Japan are competing on all fronts among East Asian stocks. So much so that it risks becoming something of a self-fulfilling prophecy.”

The Topix has rallied over the past four weeks and the won has gained against the yen as U.S. economic data improved, sending a Citigroup Inc. gauge of positive surprises to the highest level in seven months.

The Korean currency reached a six-year high of 0.1035 yen yesterday. The head of the Bank of Korea’s currency market team, Lee Seung Heon, said a day earlier that the central bank is closely monitoring the exchange rate.

The Topix closed above 1,300 yesterday for the first time since January, after Japanese Prime Minister Shinzo Abe appointed new ministers to restore confidence in his economic policies. Abe made Yasuhisa Shiozaki health minister, giving him a mandate to change the Government Pension Investment Fund, the world’s largest retirement fund, to let it buy more risky assets.

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