Why Japan Stocks Are Smashing Out New Highs Despite ScandalsBy and
Nikkei 225 Stock Average rose to highest since 1996 Wednesday
Earnings forecast boosts and elections keeping market buoyant
Corporate scandals may be tainting Japan’s once-revered business reputation, but at least one market isn’t perturbed: equities.
The Nikkei 225 Stock Average shot to a level unseen since December 1996 on Wednesday, even as investors licked wounds after Kobe Steel Ltd. lost 36 percent over a record two-day slide on its false product data debacle. A day earlier, the nation’s benchmark Topix index climbed to a 10-year high.
The buoyant market is reflecting investors’ expectation that Japan Inc. will boost annual profit targets during the upcoming earnings season as well as an anticipated victory for the Abe administration in the upcoming election. A global rally that has added more than $20 trillion to worldwide share values hasn’t hurt.
“For the Nikkei 225 to head for levels like 21,000 and 22,000, Abe will have to win big, without which foreign investors won’t be convinced,” said Yoshihiro Ito, chief strategist at Okasan Online Securities Co. in Tokyo. “Of course, one thing that has to back all this up is the economy, and whether corporate earnings will show bigger growth.”
Even as the Nikkei 225 marked a milestone, the scandal engulfing Kobe Steel deepened as the company said it falsified data on several products, wiping out $1.6 billion of its market value. Leading customers from Shinsho Corp. to Mitsubishi Corp. have been sucked into Kobe’s false product data debacle, triggering outsized moves in debt, credit and equity securities associated with Japan’s third-largest steelmaker by output and sales.
Foreign investors poured 201.8 billion yen ($1.8 billion) into Japanese stocks during the last week of September and became net buyers for the first time since July amid expectations for robust earnings growth as the reporting season kicks off in late October.
“We have a pretty positive Japanese equity story, we actually have an overweight in Japanese equities,” said Ben Luk, global macro strategist with State Street Global Markets, at a press event in Hong Kong. “Japan has the highest earnings growth potential because earnings momentum is also highest right now. Earnings are there, valuation is a great support and now you’re seeing a political backdrop which is still supportive of growth.”
The Nikkei 225 has surpassed a key 38.2 percent Fibonacci-retracement level. The next common retracement of 50 percent stood at 22,981.49 yen as of Wednesday as the gauge closed up 0.3 percent to 20,881.27. The measure added another 0.3 percent as of 9:45 a.m. local time Thursday.
Investors may still be cautious going forward. In the same time it took the Nikkei 225 to just get back to its late 1996 levels, the S&P 500 Index has soared 243 percent. Among major markets, only Italian stocks have done worse than those in Tokyo.
Further weakness in the yen will be crucial for a sustained rally in Japanese stocks, Okasan’s Ito said.
“We’re now in the ‘high’s zone,’” he said. “We’ve seen these highs in 1996 and in 2000 and so forth, but stocks have always pulled back from these levels without being able to stage a breakthrough.”
— With assistance by Narae Kim, and Naoto Hosoda