Good day forex and stock fans! Earlier today I presented my commentary on the recent price action of Shanghai Composite Index (kindly see my previous post here). Now, it’s Japan’s turn to be heard so here it is. On today’s canvas is the daily chart of the Nihon Keizai Shimbun Stock Market Index or the Nikkei 225 Index for short. In case you do not know, the Nikkei is the leading stock market in Japan which comprises the top 225 companies that are listed in the Tokyo Stock Exchange. The index gives a good indication of financial and economic conditions in Japan, as well as Asia. The Tokyo Stock Exchange, by the way, is ranked number 2 among the largest t stock exchanges in the world in terms of market capitalization behind the NYSE. For a long time, Japan had also been the second-largest economy in the world behind the US. Though, the Land of the Rising Sun had been overtaken by China in 2009 when the latter posted a whopping 11.9% jump in its GDP during the fourth quarter of the year. In any case, the Nikkei is still one of the most followed indices in the world.
So looking at the Nikkei’s daily chart, it seems to be on the verge of breaking down from a head and shoulders formation as well. The index is now hanging by a thread as it trades just above the 9,200.00 psychological number. The index would easily fall down to 9,000.00 if 9,200 breaks. But if the support at 9,000.00 gives way, it could further slide until it meets its minimum downside target of 7,750.00. The 50-day moving average has just crossed below the 200-day MA, suggesting a likely move downwards. The MACD has also made a bearish crossover signal with its histogram recently turning negative. On the upside, if the 9,000.00 holds, then the index could continue with its sideways movement.
Fundamentally, despite being ranked as the number 3 largest economy in the world, Japan has also been plagued with many heartaches. To top the list is its problem regarding deflation. In May, Japan reported a 1.3% year-over-year decline in the Tokyo core CPI. With the country’s household spending also dipping by 0.7% during the same month, it is pretty obvious that domestic demand in Japan is nowhere near to pull its CPI back in the positive territory. While falling prices may sound good at first, it indicates a lack of consumption in the country which by the way takes up about 57% of the country’s GDP. In fact the Bank of Japan is anticipating that the country will stay in this environment for at least five more years.
The appreciation of the yen due to the risk aversion in the market is also not helping Japan’s cause. Japan is also an export-based country. And as the yen gets stronger Japan’s exports become relatively more expensive as well, placing a downward pressure on demand. With the debt crisis in Europe and the recent weak economic showing of the US and China, the market has been covering a lot of their short yen positions. Remember that the Japanese yen, due to its low interest rate of 0.10%, is used to fund investments in equities and other higher yielding assets.
Regarding Japan’s GDP, it’s no secret now why the country contracted by 5.0% for the whole of 2009. Consumption was bleak as evidenced in the country’s inflation numbers. Japan’s exports had also been receiving a lot of downward pressure due to the rapid rise of the yen. Now, without those massive spending by the government, the country would have sunk by more. Of course, the government’s huge spending caused its public debt to surge to 192.1% of its GDP in 2009. Despite the already high level of debt, the government was still pushing for a record ¥92.3 trillion budget for the next fiscal year. In my opinion, if the country does not improve its consumption and organically grows, it could be a good candidate for a debt downgrade down the line since it needs to pay off whenever part of their debt comes due.