TOKYO -- Don't be fooled: Friday's rebound by Japanese stocks was caused by more than U.S. President Donald Trump's talk of eventual stimulus measures.
The Nikkei Stock Average surged 471.26 points to 19,378.93, the second-biggest gain this year. The trigger was Trump once again, this time his signaling of upcoming proposals for tax cuts and other stimulus steps that brightened investor sentiment and spread buying to Japan as well.
But anyone watching options trades through Thursday likely saw a sharp upturn coming, as Hideki Horikawa of Fairline Partners did. "Transactions for downside risk" -- such as buying of put options -- "were surprisingly low," he said, even ahead of Friday's summit between Trump and Japanese Prime Minister Shinzo Abe, the outcome of which could rock the market.
Trump's stimulus remarks were welcomed, but the words of the new president have triggered selling at other times. For example, Japanese stocks have nose-dived after he expressed wariness over a strong dollar. It would be no surprise if such unpredictability fuels anxiety.
But the Nikkei Stock Average Volatility Index shows a different picture. Even as the stock benchmark seesawed earlier this week, the volatility index -- which tends to rise amid growing unease -- edged down gradually. Similar indexes remain low in the U.S. and Europe as well, meaning investors are not worried about downside risk.
"While wary of political uncertainty, investors' true feeling is that they are bullish about equities all over the world, including Japan," said Makoto Furukawa, chief portfolio strategist at Mitsubishi UFJ Morgan Stanley Securities. Furukawa said he saw many investors reducing weighting on bonds and increasing it for stocks when he visited Europe in late January.
Japanese and U.S. businesses have the prospect of improving earnings, and thus their stocks have upward mobility, said Carmel Wellso, director of research at Janus Capital.
Such optimism is driven by the general recovery trend in the global economy. To assess market sentiment, Takashi Kamiya of T&D Asset Management uses the CRB index of raw materials prices, which tends to reflect real demand for copper, zinc and other commodities and excludes crude oil, gold and others targeted by speculative trading. The index is at its highest in 28 months, which Kamiya says "indicates the strength of the real economy."
Such strength globally benefits Japanese equities. Pretax profit at leading businesses in Japan likely logged the first year-on-year increase in six quarters in the October-December term, according to Daiwa Securities. Factors other than a weaker yen are emerging, such as growing demand for chips, the brokerage said. If earnings and the economy are recovering, the shift from bonds to stocks is a reasonable move.