The Japanese Market: Anatomy of a Secular Reversal

For many years in the last two decades the Japanese equity market has been taken as a textbook case of secular bear market. Since the historical high of 1989 the Nikkei 225 stock index of Japan has been subdued by a prolonged downtrend that hit its lowest low in 2009 after losing about 80% from the high. Intermediate rallies had developed meanwhile, some of them were consistent, like the four years recovery started in 2003, but the although considerable +130% that followed did not reverse the secular trend that prevailed again thereafter whit a new deep fall.

The 2009 low has marked the reversal point for the Nikkei 225 from which a new bullish construction has been developing in the last eight years, through ups and downs. Despite intermediate corrective stages, the Japanese index tripled its value since then. Why, so, this new course of the formerly most subdued index among the developed markets is gaining significance just now? Many explain this with improved fundamentals, company earnings are rising, unemployment is historically low, wages are hedging up, it doesn’t look as the Bank of Japan plans to raise interest rates yet.

Figure 1 – Nikkei 225. Weekly data since 1985. A long-dated reversal pattern that is gaining strength

From a technical standpoint, the new record of 21’000 for the Nikkei confirms an important reversal pattern that has been developing above the two historical lows of 2003 and 2009. The intermediate high of 2007, a little above 18’000, is the resistance of a double bottom that was exceeded two years ago, then a consolidation took place and a new robust rally pushed the index above the 38.2% retracement of the bear market 1989/2009 thereafter. The recent breakout confirms the bullish stance that is launched towards the next retracements of the bear market mentioned above, 50% and 61.8% respectively, next targets and resistances at 23’000 and 26’750.

The Japanese equity market is often influenced by the swings in the Dollar-Yen parity. The obvious reason for this recurring correlation is that a lower yen improves the competitiveness of the Japanese exports. The Yen has been historically strong for years and is traditionally considered a safe-haven currency, but its strength is not of big help to the economy. For this reason, the Nikkei usually welcomes the rising trends of the U.S. dollar against the yen. A chart of the parity since 2014 is shown in Figure 2. Most of 2017 has been negative for the dollar that is confined in a down-trending channel of which is testing the upper limit. The recent recovery is not signaling a trend reversal yet. A rise above 115 would interrupt the down-trending line that weighs on the dollar since 2015. Such a move would certainly help the Nikkey to confirm the recent strength.

Figure 2 – U.S. dollar against Japanese yen. Weekly data since 2014. A breakout above 115 would mark a trend reversal

Alberto VIVANTI – SAMT Vice President – Graubünden and Liechtenstein Chapter– alberto.vivanti@samt-org.ch

Disclaimer: the above article is for general information and educational purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.