Nov 22, 2023

The Nikkei shows signs of a top in the daily chart and could be corrected further.


JPN225 – Daily Chart

The Nikkei index found resistance at the 33,828 level, the highest in June this year. There is now potential for another retracement of similar size. That would initially put support around 32,500.

Further chances of a high are accompanied by media expectations for a further rally. A Reuters poll said the index could rise to 35,000 by mid-2024.

Japan’s share average has returned more than 28% this year. All respondents forecast continued earnings growth despite tailwinds from a weaker yen starting to dissipate with the Bank of Japan approaching the end of its stimulus and the Federal Reserve tightening, reaching an end. The consensus for the Nikkei’s level in mid-2024 was 35,000, with responses ranging from 31,143 to 39,500.

Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui in Tokyo, said that pent-up demand in business investment and consumer demand would lead to the Nikkei reaching 39,500 in June and 40,900 by the end of 2024.

There are positives for the Japanese market. Half of the listed Japanese companies trade below book value, while 20% hold more cash than their market cap. Corporate profits ex-financials reached a record of 32 trillion yen in the April-June quarter. However, a weakening dollar and stronger yen are now a headwind.

Recent surveys also show that inflation expectations are finally picking up, which may lead households to invest some of the 1,000 trillion yen they currently keep in cash and deposits.

“We are constructive mainly because we are optimistic about nominal GDP growth,” Kichikawa said. “There is still room for equity prices to reflect the better picture in EPS growth.”

Other survey respondents said the yen may have bottomed after pushing near 152 per dollar earlier in the month. The Bank of Japan is expected to exit its hostile interest rate policy early next year.

According to the median poll response, that could lead to some stagnation for equities in the latter half of next year, with the Nikkei still stuck at 35,000 at year-end.

In the near term, stagnation may have arrived with the resistance barrier at 33,800, and Japanese stocks may cool by year-end.

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