January 14, 2014 1:00 pm JST

Markets bullish on Japan's 2014

TOKYO -- Financial market players are betting the yen will weaken further and Japanese stocks head up in 2014, continuing last year's trend.

     Many market participants expect the yen to fall below the 110-yen-per-dollar mark and the Nikkei Stock Average to stand at around 19,000 points by the end of the year.


   These predictions are based on the optimistic view that the economy will remain on a firm footing even though the planned consumption tax hike in April will temporarily dampen domestic demand.

     Many in the market, however, warn of risks. Unexpected monetary policy moves in Japan or the U.S., and unpredictable political events at home or abroad, could lead to a change in sentiment.

     Financial markets in Tokyo received this year's first disquieting news Friday. The U.S. Labor Department said American employers added 74,000 jobs in December, far below the expectations of a nearly 200,000 increase among many economists. The dollar fell by more than one yen to the lower 104-yen band in overseas currency markets after the data was released.

Chill out

Many analysts think the U.S. employment data are unlikely to have a significant long-term impact on markets. They see the slowing of job growth as a temporary adjustment caused mainly by the extreme weather the U.S. has been experiencing, which caused job losses in sectors such as the construction industry.

     The consensus view is that the yen will continue to weaken against the dollar. This is supported by two key factors -- Japan's massive trade deficit and a widening gap in interest rates between Japan and the U.S.

     The Japanese government has estimated the nation's trade deficit in fiscal 2014 to be around 10 trillion yen ($94.3 billion), little changed from the 10.1 trillion yen in fiscal 2013. The huge trade red ink will keep demand for dollars among Japanese importers strong, putting downward pressure on the yen.

     Japanese and U.S. interest rates are expected to diverge as the Federal Reserve scales down, or tapers, its bond-buying program. The move will push up interest rates in the U.S. gradually, while the Bank of Japan's continued purchases of huge amounts of government bonds will keep rates down across the Pacific.

     The December job data were certainly weaker than expected but not so much so as to force the Fed to slow down the pace at which it will unwind the aggressive monetary easing campaign, according to Shogo Fujita, chief Japanese bond strategist in Tokyo at Bank of America Merrill Lynch.

     Meanwhile, BOJ Gov. Haruhiko Kuroda is willing to take additional easing measures if necessary. The dominant view in financial markets is that the inflation target will not be achieved under current circumstances. There are therefore expectations among market players that the central bank will pour further money into the economy.

     The situation means the greenback's upward bias against the yen will remain intact, at least for the time being.

Exports coming     

The yen's further weakening will give a big boost to the bottom lines of Japanese exporters. The trend will "finally start having an impact on the Japanese economy," said Tsuyoshi Shimizu, chief strategist at Mizuho Asset Management.

     A lower yen will also add to the stock market momentum by encouraging investors to buy the stocks of major exporters such as automakers. Rises of such large-cap issues tend to drive up the overall stock market indexes. Bulls are now say the Nikkei index will climb to around 19,000, a level not seen since 2000.

     The central banks in Japan and the U.S., however, could roil the markets by making misguided comments or sending out wrong messages. Fed Chairman Ben Bernanke's remarks last May on scaling down the central bank's quantitative easing campaign unnerved financial markets.

     There are also political risks to consider. Any fresh flare-up of the partisan confrontation in the U.S. due to the approaching of midterm elections in November could again muddy the country's fiscal outlook. Congressional gridlock could also derail Trans-Pacific Partnership trade negotiations.

     Meanwhile in Japan, Prime Minister Shinzo Abe's visit to Yasukuni Shrine late last year has further provoked tension in Japan's relations with China and South Korea. Such developments could negatively affect Japan's trade with China, with considerable consequences for the economy and the stock market.

     Foreign investors could start pulling money out of Japanese stocks if they come to believe that the Abe administration is shifting its focus from the economy.