Goodbye deflation, hello Nikkei average at 18,000? Japan experts talk 2014
TOKYO -- It has been quite a year for Japanese stocks. But as December zooms by, the big question is what will next year bring? Experts who participated Wednesday in a discussion hosted by the Japan Center for Economic Research see inflation setting in and the Nikkei Stock Average touching 18,000, with a few hiccups.
The theme of the discussion was "finding opportunities for investing in Japanese stocks in 2014." Hiroki Tsujimura, chief investment officer at Nikko Asset Management, and Shun Maruyama, chief Japan equity strategist at BNP Paribas Securities (Japan), spoke with moderator Daisuke Arakawa, editor of The Nikkei's Capital Market and Corporate News Department.
Q: What is your view of the Japanese stock market's performance this year? And how do you think the market will do next year?
Tsujimura: The period from this year through next year may end up being remembered as historically significant. The Nikkei average jumped 50% from the beginning of the year; it surged 80% if you go back to when then Prime Minister Yoshihiko Noda called for the lower house to be dissolved in November 2012.
It's also important to note that overseas investors were buying while domestic investors were selling. After 15 years of deflation, the market showed a pattern of investors moving to sell when prices rise. After the Nikkei average moved out of a range of stubborn resistance, though, domestic investors' behavior started shifting toward buying when stock prices go down. This behavior is common during inflation.
For now, investor sentiment remains mixed, with both positive and negative incentives. The market will enter a critical stage next year.
Maruyama: The Bank of Japan's monetary easing this year changed market expectations. It made market players take a fresh look at the overvalued yen and undervalued stocks in the first half of the year. Yet the trend hit a ceiling; the expectations proved hard to maintain and the market momentum failed to accelerate. The market will reach another turning point and go one step further next year.
Q: Japan's 5% consumption tax is set to be raised to 8% in April. How much of an impact will this have on the stock market and the economy as a whole?
Maruyama: The scale of the tax hike and the government's economic measures mean that, from a macro perspective, the impact will be limited. However, there will inevitably be negative effects on companies and households, while the public sector will get a lift. Even with income benefits and tax breaks for mortgage holders, there will be bumps on the way to economic growth. A slump in the private sector and households will significantly affect the stock market.
Tsujimura: The tax hike will weigh on consumer spending. But there is no doubt the government and BOJ want to prevent the economy from turning sluggish as they pursue 2% inflation. There is also the plan to raise the consumption tax to 10% in October 2015. I predict they will have no choice but to consider economic stimulus measures and additional quantitative monetary easing.
Q: What do you expect from the BOJ?
Tsujimura: The BOJ's current easing program, launched in April, surprised the market. If BOJ Gov. Haruhiko Kuroda intends to provide another surprise, the central bank will need to introduce additional easing in early 2014. Many market participants believe the bank will wait until early autumn to do more. Implementing new measures before the consumption tax increase would deliver a big jolt.
Maruyama: The BOJ will decide to introduce additional easing before the tax hike puts the brakes on domestic consumer spending. I think they will act as early as March, but in April at the latest.
Q: Do you think overseas investors will keep buying Japanese stocks?
Tsujimura: Foreign investors have been consistent net buyers of Japanese stocks since the beginning of the year, with purchases exceeding sales by about 13 trillion yen ($125 billion). However, while this year's stock market upsurge has been compared with gains under the government of former Prime Minister Junichiro Koizumi, the momentum did not quite measure up. I expect many overseas institutional investors are not satisfied with their purchases of Japanese stocks -- they must want more. There are also signs that foreign money is flowing into Japanese stocks through exchange-traded funds on overseas markets.
Q: What are your expectations for currency exchange rates, taking into account the prospect of the U.S. Federal Reserve scaling back its easing?
Maruyama: European currencies and the Chinese yuan will remain firm until the beginning of spring. Even with the Fed taper issue, the dollar will likely rise to 110 yen early in the first half of next year as the domestic economy improves. That said, the yen may resist further declines in the second half of the year.
Tsujimura: I predict the yen will only fall against the dollar. Yen selling may accelerate due to three factors.
The first is the gap between Japanese and U.S. monetary policies. The U.S. will soon slow the pace at which paper money is supplied, whereas the BOJ will keep its current pace.
The second factor is that Japan's current-account balance will deteriorate, while the U.S. will add to its trade surplus. Thanks to the shale gas revolution, the U.S. will wean itself off energy imports.
The third reason is that we can expect an increase in the so-called yen carry trade -- when investors borrow large amounts of Japan's currency at low interest rates and use it to invest in currencies where interest rates are high.
Q: What about the outlook for the Nikkei average?
Maruyama: In the first half of next year, as the dollar climbs to 110 yen, the Nikkei average will hit 18,000. Taking into account possible market-influencing events -- additional monetary easing, and reforms in the management of Japan's public pension program -- the benchmark index will achieve a peak in the middle of the year, as it did this year. It will then lose some steam, but the correction will be in the 15,000 to 18,000 range, as interest rates will slowly increase in line with a continued downtrend in the yen and a moderate economic recovery.
Q: Which sectors look promising from a stock perspective?
Maruyama: Banks are most likely to gain momentum. There should be plenty of money in the world. Stocks cannot rise without improvements in banks' function as credit intermediaries.
The yen's fall will also push automakers and other exporters higher. In addition, shares in small and midsize companies are likely to be reassessed, as they have been undervalued.
Q: Let's look further ahead. Will the uptrend in Japanese stocks continue in the medium and long term?
Tsujimura: This year's surge must have made many players, foreign and domestic, sit up and take notice that something remarkable is happening. But there will also be a realization that the past was unusual -- that 15 years of deflation was out of the ordinary -- and that Japan's economy is returning to normal. Inflation will then send stocks higher.
It would not be surprising even if the Nikkei average were to rise 100% by 2020, when the Summer Olympics come to Tokyo. Japan is finally catching up with other countries.