December 31, 2013 2:00 am JST

2013 brought stock boom, plunging yen to Japan

TOKYO -- Japan's key stock index ended the year with the sharpest gain in 41 years while the yen weakened against the dollar by the largest percentage in 34 years on growing optimism that the country will finally beat deflation.

     The Nikkei Stock Average closed at 16,291.31 on Monday, the last trading day of the year, rising a whopping 57% this year. The index climbed for the ninth straight day, the longest rally in four years, and hit its highest closing high in more than six years.

     The Japanese currency has weakened by 19 yen, or 18%, against the dollar so far this year. The yen touched a five-year low in the mid-105 range against the greenback on Monday.

     The stock rally and the yen's slide were driven by expectations that Japan will pull out of a deflationary spiral on the back of aggressive monetary easing measures pushed by Bank of Japan Gov. Haruhiko Kuroda and the economic policies of Prime Minister Shinzo Abe.

     Prices for some products have already started to rise. The price of eggs, which is considered very stable, hit the highest in eight years and eight months, while prices climbed for copper and other industrial materials. The Nikkei Commodity Price Index, which measures the prices of 42 basic materials in transactions between businesses, finished 2013 at its highest level in five years and three months.

     This trend in prices, coupled with a weakening yen, will likely help major domestic corporations log a double-digit increase in pretax profit in fiscal 2014, predicts SMBC Nikko Securities. Foreigners, who account for about 60% of trading of Japanese stocks, bought a record of almost 15 trillion yen ($140 billion) more in Japanese shares than they sold this year. Trading value on the first section of the Tokyo Stock Exchange doubled from a year earlier on active buying by overseas investors.

     This buying "is based on confidence that the government is watching the market carefully," says Hiromichi Tamura, chief strategist at Nomura Securities.

     "The economy swung sharply from negative to positive territory," said Abe, who attended the TSE's last trading day of the year, the first time that a sitting prime minister has done so. "Abenomics is a buy, next year as well."

     Looking around the world, money flowed from emerging markets to industrialized nations this year. Speculation that the U.S. Federal Reserve Board will scale down its monetary easing began to emerge around the middle of the year, leading investors to cash out of the stock markets of such countries as China and Brazil. Meanwhile, stock indexes hit all-time highs in such markets as the U.S. and Germany, which have recovering economies.

     America's tapering back of easy-money policies is a sign that the country's economy is strong. It also leads to higher interest rates there that cause the yen to weaken against the dollar. These factors, which help Japanese firms both in terms of exports and yen-based earnings, were another source of fuel for Japan's stock market engine.