Has Japan’s Stock Market Peaked? Buy on Dips
By Danish Lim Zhi Lin, Investment Analyst
Current Performance of SGX Nikkei 225:
The SGX Nikkei 225 Index Futures contract underperformed in April (-5.03%) and was nearly flat in May (-0.05%) as the rise in 10-year JGB yields following the BOJ’s March and May meetings weighed on semiconductor names and other growth stocks.
Impact of Yen Depreciation:
However, despite rising yields, due to interest rate differentials and carry trades, the Yen continued to depreciate against the Dollar. Although a depreciating currency previously helped the Nikkei 225 climb to new record highs, it has also resulted in higher imported inflation, weighing on companies including retailers and railway operators that rely on domestic spending.
A survey conducted by Teikoku Databank on May 17 reported that about 64% of firms surveyed said the recent depreciation of the yen has eroded their profits.
Nikkei 225 Outlook & Trading Opportunity:
In our opinion, yen depreciation, once a key growth driver, now exerts downward pressure on the stock market. We note that the correlation between a weaker yen and stronger stock prices started turning flat once the yen depreciated past ¥155/$.
Nevertheless, we anticipate delayed BOJ rate hikes and delayed FOMC rate cuts to translate into an easing of yen depreciation pressure- supporting a Yen rebound and enabling Japanese equities to outperform in 2H 2024. Corporate governance reforms should provide support for Japanese equities over the medium to long term.
We see any near-term weakness or pullback as an entry opportunity.
Expressing Our View:
We favor the hypothetical trade setup below to express our view:
Long SGX Nikkei 225 Index Futures
The daily chart shows the contract consolidating around the 38,000 – 39,500 level.
With a Trend-based Fibonacci Extension drawn from the October 2023 low, we prefer to take entry at around 38,430, as we view current weakness as an entry opportunity. The 14-day RSI indicates that the contract is currently not at overbought levels.
We set our target level at the 0.50% extension level around 42,035. Stop loss is set below the key support level at 36,650. This setup delivers a reward: risk ratio of 2.03x.
• Entry Level: 38,430
• Target Level: 42,050
• Stop Loss Level: 36,650
• Profit at Target: 3620 x ¥500= ¥1,810,000
• Loss at Stop: 1780 x ¥500= ¥890,000
• Reward: Risk Ratio: 2.03x
Trade Nikkei 225 at only 50 cents* now
Capitalise on the Nikkei 225’s movements—trade SGX Nikkei 225 Index Futures at only 50 cents* now and stand to win a pair of air tickets to Japan. Learn more here.
*For applicable terms and conditions and a full risk disclaimer, please refer to phillipnova.com.sg. This ad has not been reviewed by MAS
Current Performance of SGX Nikkei 225:
The SGX Nikkei 225 Index Futures contract underperformed in April (-5.03%) and was nearly flat in May (-0.05%) as the rise in 10-year JGB yields following the BOJ’s March and May meetings weighed on semiconductor names and other growth stocks.
Impact of Yen Depreciation:
However, despite rising yields, due to interest rate differentials and carry trades, the Yen continued to depreciate against the Dollar. Although a depreciating currency previously helped the Nikkei 225 climb to new record highs, it has also resulted in higher imported inflation, weighing on companies including retailers and railway operators that rely on domestic spending.
A survey conducted by Teikoku Databank on May 17 reported that about 64% of firms surveyed said the recent depreciation of the yen has eroded their profits.
Nikkei 225 Outlook & Trading Opportunity:
In our opinion, yen depreciation, once a key growth driver, now exerts downward pressure on the stock market. We note that the correlation between a weaker yen and stronger stock prices started turning flat once the yen depreciated past ¥155/$.
Nevertheless, we anticipate delayed BOJ rate hikes and delayed FOMC rate cuts to translate into an easing of yen depreciation pressure- supporting a Yen rebound and enabling Japanese equities to outperform in 2H 2024. Corporate governance reforms should provide support for Japanese equities over the medium to long term.
We see any near-term weakness or pullback as an entry opportunity.
Expressing Our View:
We favor the hypothetical trade setup below to express our view:
Long SGX Nikkei 225 Index Futures
The daily chart shows the contract consolidating around the 38,000 – 39,500 level.
With a Trend-based Fibonacci Extension drawn from the October 2023 low, we prefer to take entry at around 38,430, as we view current weakness as an entry opportunity. The 14-day RSI indicates that the contract is currently not at overbought levels.
We set our target level at the 0.50% extension level around 42,035. Stop loss is set below the key support level at 36,650. This setup delivers a reward: risk ratio of 2.03x.
• Entry Level: 38,430
• Target Level: 42,050
• Stop Loss Level: 36,650
• Profit at Target: 3620 x ¥500= ¥1,810,000
• Loss at Stop: 1780 x ¥500= ¥890,000
• Reward: Risk Ratio: 2.03x
Trade Nikkei 225 at only 50 cents* now
Capitalise on the Nikkei 225’s movements—trade SGX Nikkei 225 Index Futures at only 50 cents* now and stand to win a pair of air tickets to Japan. Learn more here.
*For applicable terms and conditions and a full risk disclaimer, please refer to phillipnova.com.sg. This ad has not been reviewed by MAS
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