On December 5th, I published an update in which I showed an important resistance level at 16,000 that needed to be broken above for further confirmation of the bull market. This level was broken today, as the chart below shows:
Note: If the 16,000 level is broken again on the downside, leading to a “bull trap”, I would no longer be inclined to hold a short-term tactical bullish view on the Nikkei. All trades should have a pre-determined exit strategy, and that would be the trigger that would tell me to close out the trade.
The U.S. dollar to Japanese yen currency exchange rate also broke above an important resistance level this month (the yen is weakening against the dollar), which is bullish for Japanese exporters. This chart breakout implies that further yen weakness is likely:
Breakouts from bullish symmetrical triangles often lead to explosive gains that can rival the rally that led into the triangle pattern in the first place. It is very possible to see another Nikkei rally that is similar to the one that occurred in late-2012 and early-2013.
- The weaker yen is boosting Japanese exports and exporting companies. Japan’s exports rose for a ninth consecutive month in November, led by automobile sales to the U.S. and China.
- The Japanese government launched a 18.6 trillion yen ($182 billion) stimulus package in early December that includes 5.5 trillion yen worth of spending measures that are intended to boost the country’s economic growth.
- The economy appears to be in the early stages of exiting deflation for the first time in five years after the core CPI rose by 0.3% in October, which is the largest increase since 1998. In addition, an important government economic report omitted the word “deflation” from its text this week for the first time in four years. The Bank of Japan has set an inflation target of 2% within the next two years, and has committed to doing whatever it takes, so to speak, to achieve that goal. Simply stated, Japan’s central bank intends to continue flooding the country’s economy and financial system with monetary stimulus or “printed money” until its economic growth and inflation rate goals are attained.
- A recent Reuters poll showed that nearly two-thirds of Japanese corporations expect the Bank of Japan to increase its stimulus in the first half of 2014.
- Japan’s economic growth is now one of the fastest of all developed economies: in the first half of 2013, the economy grew by nearly 4 percent, which is double the U.S. economy’s growth rate. Japan’s economy is expected to have grown by 3 percent in the second half of 2013.
- The Japanese government may announce a corporate tax rate cut to 35.64% from 38.01% in spring 2014 to bolster corporate wage growth.
- Japanese stocks are relatively cheap: the Nikkei trades at approximately 1.5 times its book value, which is a 40 percent discount to the U.S. stock market.
- Many Japanese companies are cash-rich and are looking to increase buybacks of their own shares.
- The U.S. Federal Reserve’s recent quantitative easing taper plan was more dovish than expected, which has helped to calm global markets and allow many of them to climb to new heights.
While I believe that these aforementioned factors are likely to be bullish for Japanese stocks in the intermediate term, I suspect that the Bank of Japan is actually inflating a growth-boosting economic bubble through its aggressive Keynesian-style monetary policies. I call this phenomenon a “title="Bubblecovery or Bubble-Driven Economic Recovery">Bubblecovery” or bubble-driven economic recovery, and I expect these ersatz recoveries to end disastrously when the underlying economic bubbles ultimately pop. In the meantime, it is difficult to deny bullish tactical signals that markets give when they are in the early stages of a bubble.
There are numerous ways for traders to take advantage of a possible Japanese bull market, though I prefer using trading vehicles that hedge against yen weakness, such as the U.S.-traded Wisdom Tree Japan Hedged Equity ETF (DXJ), which is preferable to ETFs such as the popular non-currency hedged iShares MSCI Japan Index (EWJ). For those who are able to hedge their own currency exposure or are willing to trade unhedged, Japanese financial firms are likely to benefit most from a Nikkei bull market. Americans can buy U.S.-traded Japanese financial companies such as Nomura (NMR), Mitsubishi Tokyo Financial Group (MTU), Mizuho Financial (MFG), and Daiwa Securities Group (DSEEY) to take advantage of this trade thesis.