May 13, 2017 6:11 am JST

Resurgent risks block Nikkei's small jump past 20,000

Investors disappointed by strong yen, spooked by US politics

TOKYO -- Factors ranging from a stronger-than-expected yen to political turbulence in the U.S. look to keep the Nikkei Stock Average from making its long-awaited return above 20,000, at least until the dust settles.

The Tokyo market's climb has slowed this week, keeping the Nikkei index just south of investors' favorite psychological benchmark, which was last reached in August 2015. The stock average ended Friday down 0.39%, at 19,883.

Dashed hopes for weakening in the yen are largely to blame. Investors were expected to sell the safe-haven currency this week after France's presidential election ended in far-right firebrand Marine Le Pen's defeat by centrist Emmanuel Macron, banishing a major source of political risk. The Japanese currency weakened to more than 114 yen to the dollar in after-hours trading Tuesday as forecasts that the U.S. will hike interest rates in June gathered strength. Nikkei index futures even topped 20,000 after the Tokyo market closed.

Falling short

But market players' excitement turned to disappointment the following day, when the yen failed to hit 115 to the dollar in Tokyo. Political risks re-emerged as North Korea hinted at a potential nuclear weapons test, and U.S. economic figures proved mixed.

So-called macro hedge funds speculating on large-scale economic shifts "have little reason to chase Japanese stocks as they climb," said Kyoya Okazawa of BNP Paribas Securities. No other eager buyers have stepped in.

U.S. President Donald Trump added to investors' concerns on Tuesday evening Washington time, when he suddenly fired FBI Director James Comey, drawing harsh criticism even from some in his Republican Party. The ensuing political firestorm "could delay implementation of policies" the president has promised, including massive infrastructure spending and corporate tax cuts, according to a source at a Japanese securities firm.

Shares that had benefited from hopes for such policies took a tumble. Construction machinery maker Komatsu ended Friday down 2.26%, while conglomerate Hitachi slumped in afternoon trading to close down 1.12%.

Systemic trouble

Supply and demand factors in derivatives trading could also be standing in the index's way. Take Nikkei-linked bonds, whose principal or interest rate varies with the stock average. These instruments are typically popular among retail investors for their high yields. But many are issued with the condition that they will be retired early if the index hits a certain level -- say, 20,000.

If the stock average were to rise 5% from Friday's close, to 20,900 or so, Nikkei-linked bonds worth a total of 926.4 billion yen ($8.16 billion) at the time of issue would be recalled within three months, according to bond data service Imperial Finance & Technology. Institutions such as securities companies that would be left holding these instruments have stepped up selling of Nikkei futures.

Still, many remain convinced that the Nikkei average will continue its climb once these uncertainties are resolved. A fund manager at France's Amundi Asset Management said his strong outlook on Japanese stocks is unchanged, citing growth in corporate earnings and adding that many securities here are undervalued.

(Nikkei)

Komatsu Ltd.

Japan

Market(Ticker): TKS(6301)
Sector:
Industry:
Producer Manufacturing
Trucks/Construction/Farm Machinery
Market cap(USD): 27,836.61M
Shares: 971.96M

Hitachi Ltd.

Japan

Market(Ticker): TKS(6501)
Sector:
Industry:
Producer Manufacturing
Industrial Conglomerates
Market cap(USD): 34,476.66M
Shares: 4,833.46M

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