Looking to the Futures

Japanese stocks have been on a tear recently, with the Nikkei 225 index (N225:JP) rallying to a new all-time high of 59,332 in February. The market wobbled after that with start of the war in Iran, but it has since stabilized to within around 2% of all-time highs. Bank of Japan policy has worked along with a weaker yen to boost Japanese equities over the past few years. The Nikkei 225 futures contract (/NKD, currently set for June settlement) had its second-highest settlement on record yesterday. 

The Nikkei has shown significant growth in recent years, more than doubling since the start of 2022. However, the index has spent the past few decades in a holding pattern following the late 80s asset price bubble. In fact, the index took nearly 35 years to get back to the record of 38,915 that it reached in December 1989. There were some fantastical numbers to come out of the bubble, including a P/E ratio of 60 for the Nikkei, and the value of Japanese real estate in Tokyo equaling the value of all the real estate in the United States.

During its journey out of the wilderness, the Japanese stock market has needed some help from the government to recover from the collapse of the early 1990s. The Bank of Japan has kept interest rates below 1% since the turn of the century. In fact, the current rate of 0.75% is the highest since 1995, as the BoJ has typically been more concerned with deflation than inflation. Beyond that, the BoJ has intervened in currency markets several times over the past few years to keep the yen from weakening too much. In addition to these normal reactions to unusual circumstances, the BoJ has intervened in its domestic markets more dramatically than other central banks. Starting in 2010, the central bank started purchasing Japanese stocks, adding to the money supply and boosting asset prices. Over time, the central bank accumulated a portfolio making up almost 7% of Japan’s equity market cap, or about $500B. Last September, the bank announced plans to start unwinding its positions, though it warned the process would be gradual and could last over 100 years.

Despite the central bank’s current policy of normalizing interest rates, the yen has weakened recently. It has given up around 11% against the dollar over the past year. That has helped the export-driven Japanese stock market. On the other hand, the deliberate pace of interest rate hikes has provided a tailwind to Japanese financial stocks, as higher interest rates can lead to higher lending margins. Yesterday the International Monetary Fund said it expected the Bank of Japan to continue raising interest rates but raised its outlook for the pace of the hikes. The next policy meeting will happen in two weeks. The BoJ has indicated its preference to bring rates up to a long-run neutral rate of around 1.5%, along with a mandate to target inflation at around 2%.

Following the record high in late February, the contract has found support around 51,000, and broke resistance around 54,000 a week ago. This setup could evolve into a bullish neckline pattern. The contract is trading above its SMAs with the 9-day recently crossing the 20- and 50-day SMAs. The MACD is strongly positive while the RSI is approaching overbought territory.

Beige Book 2:00 PM ET

EIA Crude Oil Inventories 10:30 AM ET

Empire State Manufacturing 8:30 AM ET

Export Prices 8:30 AM ET

Export Prices ex-ag. 8:30 AM ET

Import Prices 8:30 AM ET

Import Prices ex-oil 8:30 AM ET

MBA Mortgage Applications Index 7:00 AM ET

NAHB Housing Market Index 10:00 AM ET

Net Long-Term TIC Flows 4:00 PM ET

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