Is a Nikkei 225 Bottom Near?

The Nikkei 225 has been a marked laggard compared to regional and global benchmarks over the past year. To make matters worse, the Nikkei has failed to sustain rallies and has faced ongoing selling pressure, resulting in new multi-year lows of late (now at 2 years and 7 months). As of Friday’s (3/14) close of 12,241, the Nikkei is off nearly 17% in 2008 - and that’s after a 12% loss in 2007.

With the yen now at a 12-year high against the dollar and all the renewed media interest on both sides of the Pacific on the perceived implications for equities (self-fulfilling for struggling Japanese stocks), in addition to further cuts expected at the FOMC’s rate decision meeting on Tuesday, the yen seemingly has more near-term upside.

That said, empirical evidence suggests rising capitulation among individual equity investors, which in turn may indicate a bottom is near. Then again, the 25-day moving average of advancers vs. decliners at 81%, is low by rule-of-thumb measure, but far from the unprecedented 60%-levels registered last summer. There’s also the uncertainty of who will head the Bank of Japan. If you want to get overly bearish, keep talking about subprime-related pressures, while keeping in mind the deteriorating plight of consumers.

At any rate, my best guess is there will be more selling in the coming week or two, pushing the Nikkei 225 into the 11,000-level, as the yen may test the lower 90-level against the US$. With an understanding that a majority of negative factors will have thus been priced into Japanese equities and as the yen eases against the dollar with the start of the new fiscal year, there will likely be a bottom within the next month. One obviously bullish signal is the increasingly attractive yields across the board of domestic equities. Consequently, it will be interesting to watch future Japanese interest in comparatively higher-yielding non-equity overseas assets. Nevertheless, the yen , a “weak” currency itself, is still likely to trade above (but close to) ¥100/$1, even if domestic shares are bought.

Comments

[GKM]

I agree. No one is talking up Japan and I think longer term it is a great buy once the N225 gets in the 11300 range. I'll probably put on a small position around that mark and see where it goes. Further support should be at 10300 but then 8000 so need confirmed results to want to put any more in beyond a small test.

[Steven Towns]

GKM, thanks for your comment. I actually think there are quite a few out there who are aware of the seemingly attractive valuations of Japanese stocks and the potential for cap gains with a recovery of even just the 18,000-level (that would be nearly 50%) for the Nikkei 225. The problem is not many are willing to commit the capital and thus any recovery at all will take time. A key point of interest now are those dividend yields. Maybe we'll finally see Japanese investors begin to embrace domestic stocks.

[Jack K]

I would be interested to know what PE's and growth rate for a few (promising) individual stocks are. Also which one have good yields that look stable.

[User 164492]

a newb comment:as the value of the yen against the dollar goes,japanese exports to usa can only become more expensive.so,thats bad for japanese companies and their stocks.you can only see a bottom in hindsight,not predict it. i would wait for the yen to become cheaper before longing jap stocks.meanwhile,who wantsto long the yen?

[locke]

I just bailed on the Yen... It had a nice ride but it can't last forever.

[Ming]

I'm not sure what your central thesis is. Are you speaking of

(i) a dead cat bounce scenerio (since you mentioned Japanese investors giving up on the market)

(ii) or are you talking of a fundamental change in trend? And if so, then why? (your article didn't say anything about reasons, other than dividend yield, which is a weak reason)