Why is the Japanese Finance Market 2016’s Biggest Comeback Story?

November 22, 2016
Japanese Market

In The News

Buoyed by a weak yen and a favorable monetary stance from the Bank of Japan, Japanese stocks have rebounded 20% showing the best gains among developing market peers. The Topix index was poised to join the Nikkei 225 in a bull market on Monday and the broader stock gauge will be up more than 20 per cent from its low in February. The benchmark Nikkei 225 ended up 104.78 points, or 0.59 percent, at 17,967.41, at its highest close since January 6.

This is quite the recovery for a market that had fallen 18 percent in the first have as the yen strengthened Shinzo Abe’s ‘Abeconomics’ received tepid response and was unable to revive economic growth.

Trump Victory– There is increased feeling that the shocking Trump victory will now lead to higher spending that will in turn fuel a rise in US interest rates and lead to a stronger US dollar. That would of course mean a weaker yen and a excellent outlook for Japanese exporters like Sony and Toyota. The Yen has dropped 6 percent against the dollar in the last month itself, much more than any other Asian currency.

Bank of Japan monetary policy– The Bank of Japan also restrained itself and refrained from lowering rates, which allows us to infer that they believe the Japanese Economy is about to bounce back after stalling in the second quarter. “The bigger picture is that spare capacity is shrinking gradually: gross domestic product expanded by 0.9 per cent over the past 12 months, which is above potential growth,” said Marcel Thieliant, analyst at Capital Economics in Singapore to the Financial Times. The surge in growth came on the back of favourable balance of payments. Exports rose and Imports fell. The BOJ capped 10-year bonds at 0 percent.

But it’s best not to celebrate too soon because nominal growth, which does not adjust for price changes, was weaker at 0.8 percent vs the real growth of 2.2 percent. This could mean Japan is sliding into a period of deflation – a contraction of in the supply of circulated money, leading to increased purchasing power and wages higher than would have normally been.


 

This, and a lot more, is one of the topics we discuss in our Investment Banking Courses in India. You can also watch the video on our students discussing about what goes on in our classes.


 

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