Tricky with the Nikkei – Japan seems to be getting worse

WHILE many pundits in the US have spent the last two years predicting a Japanese future for America, Japan itself has not got any more popular. Instead, the strengthening yen – barely affected by occasional Bank of Japan (BoJ) interventions – has weighed heavily on Japanese equities. Where other indices have recovered from stock market falls in May, the Nikkei 225 is still languishing 13 per cent down year to date.

Traders expect that pattern to continue. The Federal Reserve is expected to unveil its new quantitative easing programme tomorrow, and a cheaper dollar may drive the yen up yet further. The BoJ could intervene to prevent that, possibly with a renewed quantitative easing programme of their own, but many are sceptical of whether it would work. A modest programme in 2008 coincided with a surging yen, as the BoJ failed to prevent the unwinding of the carry trade. David Jones, chief market strategist at IG markets, says that unless the BoJ does something “absolutely spectacular”, Japanese equities are likely to stay stagnant or get worse over the next few months.

Indeed, according to data released yesterday, Japanese industrial production is down 1.9 per cent, with vehicle manufacturing hit especially hard. The Nikkei dropped to a seven-week low yesterday, driven by falls in Honda’s share price, and the index may yet have further to drop, opening up the possibility of a short trade for contracts for difference (CFD) traders. Growth in the Japanese economy has traditionally been very dependent on export growth, and with the yen getting stronger and world trade still depressed, few expect the Japanese economy to rebound soon.

EXPORT INDUSTRIES SUFFERING

Manoj Ladwa, senior trader at ETX Capital, suggests that CFD traders might find some significant opportunities for short trades in the more export-dependent sectors of the Japanese economy. The car industry is one candidate, as is retailing. FAST Retailing – the owner of the fashion brand Uniqlo – may prove particularly vulnerable to a stronger yen.

Technology companies are also likely to do badly, not least because of the relative cheapness of competitors in South Korea, but here traders need to be very cautious. Many of the bigger technology firms have moved a great deal of production abroad, so they can benefit from a stronger yen through cheaper input prices. Sony and Panasonic, for example, have both recently reported stronger than expected earnings, with Sony in particular benefiting from success in its videogame business.

Traders need to keep a keen eye on global economic indicators too. The Japanese economy looks especially weak at the moment, with some economists predicting a lurch back into recession, but that may change if export markets pick up. Strong demand from China for cars or electronic goods in particular could help counter reduced demand from more traditional markets. Alternatively, if the dollar started climbing back up again, then the Japanese economy would probably come out as a winner.

Trading on Japanese equities is not especially popular in Britain, not least because of the deeply antisocial trading hours (the Nikkei trades between midnight and six am UK time, with a break for lunch). But with the yen getting stronger, and the Japanese economy looking ever more fragile, there may be some decent returns to be had from short trading. That will not be much consolation for the Japanese, however. As the first snow has fallen early on Hokkaido, the Japanese economy seems only to be getting colder.