TOKYO -- Protectionist policies emanating from the White House under an unconventional U.S. president are turning the stock market here gloomy. But signs that the close links between Japanese shares and foreign exchange rates are finally deteriorating could cure the pessimism.
A fund manager at a domestic asset management company noted his fear of so-called Donald Trump risks. "In the end, the directions of Japanese shares are dictated by forex rates," the manager said. "The more President Trump talks about his protectionist stance, the greater the likelihood is for the yen to appreciate against the dollar, which means this is not a good time to buy."
Yet this theory has not held true since July, when the correlation between the yen's movements and the Nikkei Stock Average ceased as the benchmark index stayed resilient to a sharp downside even during the Japanese currency's appreciation.
This shift generally is attributed to massive support from the Bank of Japan via its purchases of exchange-traded funds, a program the central bank doubled to 6 trillion yen ($52.8 billion at current rates) annually at the end of July.
Each purchase of ETFs by the central bank after the program expansion has lifted the Nikkei average by about 30 points, an analysis by Hisao Matsuura at Nomura Securities found. The BOJ has carried out 40 rounds of buying since the expansion, suggesting that these purchases have boosted the index by roughly 1,200 points.
Yet the bank's program cannot be the sole explanation. The expected Nikkei average and the yen rates have diverged by roughly 2,000 points since July, far exceeding the 1,200-point contribution from the BOJ purchases.
Earnings improvement offers another factor. The index for the ratio of analysts' upward revision forecasts versus downgrade projections bottomed out in July. Expectations that corporate earnings will recover have contributed to supporting Japanese shares even when the yen strengthens.
A recovery tied to the yen's weakening would bring things back to square one. But "the earnings upgrades made since last fall cannot be explained by forex rates alone," said Chisato Haganuma at Mitsubishi UFJ Morgan Stanley Securities. "Japanese companies increasingly shifted production overseas to make themselves less vulnerable to forex swings, and they happened to get a tailwind from a recovery in the global economy."
Sales at manufacturers' overseas units and the nominal value of exports moved in tandem prior to the financial crisis in 2008 and 2009. But after the crisis, growth in the nominal value stalled while sales by foreign subsidiaries continued rising.
Increased production abroad may be the only countermeasure Japanese businesses have to Trump's remarks, which harken to the days of trade frictions between the U.S. and Japan. Such expanded foreign production will leave Japanese stocks less affected by the yen's movements.