More Downside for Nikkei 225 as Yen Appreciates Further

Around November 18, 2007, Barron's carried an article stating that:

Japan's stock market is out of favor with most global investors. That's made it a bargain. Coming next: a rally.

What came next was not exactly a rally. The Nikkei 225 closed at 15,154.61 the Friday before the Barron's article, and on Monday, March 17 was down some 22% from the point when the Barron's article was published.

At Japan Investor, we suggested 10,000 as the downside risk for the Nikkei 225 as the US credit crisis began to unfold. It is now around 11,787, which implies some 15% further downside risk before reaching the 10,000 "bottom".

It is pretty clear that a run in the yen against the dollar to the 1995 high (JPY79 and change per USD) from the current quote of just over JPY97/USD (Tokyo 3.17.08 Afternoon Quote) implies further upside of some 22% in the yen. Since Japanese stocks have already been discounting the possibility of a dollar crash/yen surge, they may not fall as fast as the yen rises, but still have further to fall as long as the US Fed continues struggling to contain the US credit crisis.

Anyone for a long yen/short Nikkei 225 pair trade?

Comments

[Mike Pogue:]

Mr. Whitten,

In this current Business Cycle which sector(s) of the Nikkei 225 do you feel a strong Yen will have the greatest impact on?

Sincerely,

2008 Mar 18 08:09 AM

[Darrel Whitten:]

SplitAces;

Since the yen is only strong against the falling US dollar, profits of companies with high export exposure to the US would be hit the worst--both from falling US demand and a strong yen. That includes automobiles and consumer as well as industrial electronic companies. In terms of general sectors, that means automobiles and electronics. However, since both are major drivers of total Japanese profits, aggregate Japanese profits will also be hit.

2008 Mar 20 07:51 PM

[Mike Pogue:]

Thank you very much for your reply.

2008 Mar 21 11:56 PM

[jo0hn2:]

sure why not i love this one japanese company and hate to part with its shares but its not going anywhere given the grey zone problems in financials and the u.s. economy not going anywhere maybe when things start to pick up again. though Japan activley suppresses the price of the yen so no matter how high its potential itl always be somewhat pulled back by its leash and never get to reach its max potential.

2008 Apr 06 01:19 PM