Yellenomics Pushes Japan’s Nikkei to Key Resistance Level

The bullish stock market sentiment from Yellenomics has been contagious. Japan’s Nikkei has now reached a critical juncture.

From Bloomberg:

The Nikkei 225 added 2.1 percent to 14,876.41 in Tokyo, its highest close since May 22. The broader Topix index climbed 1.2 percent to 1,218.55, with all but one of its 33 industry groups rising. Shares advanced in the morning as remarks by Janet Yellen, the nominee to lead the Federal Reserve, fueled optimism the U.S. will maintain stimulus. The yen slid 0.4 percent to 99.64 per dollar.

“Yellen’s speech is making the market buoyant as the view spreads that tapering will be delayed,” said Hiroaki Hiwada, a strategist at Toyo Securities Co. in Tokyo. Aso’s comments provide “verbal support. While it’s unlikely they’ll intervene with the currency at these levels, it’s positive as it means there’ll be pressure on the yen if it strengthens.”…

As with other nations, Japan needs to be able to intervene in currency markets if necessary, Aso said at a parliamentary committee today in response to a question about the government’s special foreign-exchange accounts law. The country must set aside a proper amount of money to fund such actions, he said.

The chart above of the Nikkei 225 from stockcharts.com has not been updated.

Nevertheless, today's big gains has pushed the Nikkei to test the resistance level (blue horizontal line).

Abenomics has brought about a seemingly symmetric correlation between the Nikkei and the Yen where both has moved in inverse directions (green trend lines). This relationship passed me by when I slipped “there has been little signs of symmetry in their (yen-nikkei) flows”. 

The yen has recently been weakening that has led to a re-energized Nikkei. Today's comments by incoming Fed chief Janet Yellen only bolstered the momentum.

Also, a similar dynamic “bad news is good news” applies to Japan’s financial markets.

Today’s disclosure of the halving of economic growth rate will likely put pressure on Japan’s policymakers to apply more stimulus.

From the Financial Times

The rate of growth in Japan’s economy roughly halved between the second and third quarters, the government reported on Thursday, as weaker consumption and exports offset big rises in public spending and property investment.

According to Cabinet Office estimates, the real value of goods and services produced by the world’s third-largest economy grew at an annualised rate of 1.9 per cent between July and September…

Nonetheless, the data will sustain pressure on Shinzo Abe to keep Japan’s growth trajectory intact. Since returning to power last December, the prime minister has moved to overturn more than a decade of deflation through the “three arrows” of aggressive monetary easing, a more flexible approach to fiscal spending, and a series of overlapping initiatives to lift the country’s longer-term growth potential.

As pointed in the chart above from zero hedge, aside from a slowing economic growth and despite higher cpi, Japan's wage growth has also turned lower. 

The momentum from Abenomics seem to be fading.

This implies that the markets expect the Abe administration via the BoJ to conduct more easing in the future, thus the lower yen.

For both the Yen and the US dollar, it has been a race to the bottom. Nevertheless lost purchasing power of the average citizenry would, for the meantime, extrapolate to a bonanza for banks, financial institutions, the Japanese government and to asset investors, should the Nikkei breakout to the upside. 

Updated to add: The futures markets appear to be pointing at a successful breach.