Remember when Japanese stocks, fresh off an epic, stimulus-fueled rally suddenly collapsed 7% because a certain bearded bureaucrat in the Eccles Building said something about paring back billions in monthly asset purchases in the US? That’s a distant memory now and some say we’re unlikely to see a repeat anytime soon what with the BoJ now firmly entrenched as the biggest BTFDer in the world and throwing [5] its unlimited balance sheet at the market at the first sign of weakness. Kuroda’s “not large” 10 trillion yen equity portfolio notwithstanding, Mizuho’s Takashi Aoki says Japanese investors could be in for an unpleasant surprise.
Via Bloomberg [6]:
“It was just like Black Monday in 1987, but also strangely calm,” said Aoki, who helps oversee about $33 billion at Mizuho Asset Management Co. “The market was overbought then, as it is now. And there was the prospect of Fed tightening. But the correction in 2013 was very sharp. It should be less extreme this time.”
The Topix has advanced this year to levels unseen since 2007 and, thanks to a stable yen, is the world’s best-performing developed-market gauge when measured in U.S. dollars…
A momentum measure favored by Topix chartists, the relative strength index, touched 79.5 last week, the highest since January 2013. Traders consider anything above 70 as showing stocks are rising too fast.
“The market isn’t going to continue going up in a straight line,” said Ayako Sera, a Tokyo-based market strategist at Sumitomo Mitsui Trust Bank, which has $474 billion under management. “There are signs of overbuying again, and it’s more likely we’re going to enter a correction mode.”
...and while some are placing their faith in the BoJ to continue to look out not only for investors, but for itself (as falling stock prices are a bad thing when you are the second largest holder of equities in the country), others think the Japanese economic recovery isn’t likely to materialize according to plan. Here’s more:
Others, such as Sumitomo Mitsui’s Sera, are more skeptical, saying Shinzo Abe’s promised “third arrow” economic policies still haven’t happened two years later. The record profits are all down to the weaker yen, she says.
“Right now, the market is imagining a best case scenario for Japan,” said Tsutomu Yamada, a market analyst at Kabu.com Securities Co. in Tokyo. “The market is thinking the virtuous cycle is beginning and Japan will finally escape from deflation, but the achievement of best case scenarios doesn’t come along that often.”
Masayuki Doshida, senior market analyst at Rakuten Economic Research Institute in Tokyo, says expectations for improvements in earnings and corporate governance have run too far ahead of the reality…
“Because stocks are rising in advance of good news rather than on good news, it’s questionable whether they can keep going much longer,” he said.
In terms of investors betting on the central bank's ability to support the stock market indefinitely without something going horribly wrong, we would point out that Abe and Kuroda haven't been so successful when it comes to a couple of their other policy aims, namely boosting inflation expectations and in turn, juicing consumer spending. Spot the odd one out:
[7]
