If history is any guide, the stock market may perform solidly in 2011, the Year of the Rabbit according to the Chinese lunar calendar, with the dollar gaining against the yen as the U.S. economy moves toward recovery.
The 225-issue Nikkei stock index will likely trade between 9,500 and 12,500 in 2011, and the dollar is expected to trade roughly between ¥80 and ¥95, many analysts say.
The first half of 2011 could be slow, they say, affected by fluctuations in the currency market, but the Nikkei is likely to trend upward, benefiting from a steady U.S. economic recovery, a stronger dollar against the yen and the robust growth of emerging economies.
“We are unlikely to see the economy falling into a double dip in 2011, unlike 2010, when such worries emerged,” said Masatoshi Sato, senior strategist at Mizuho Investors Securities Co.
“There may be some correction in the recent optimism about the U.S. economic recovery, and a stronger yen against the dollar between January and March,” Sato said. “The real test comes around the summer, when we see what the Federal Reserve will do about its quantitative easing, and whether an extension of Bush-era tax cuts will boost the economy.”
Historically, the Nikkei climbed 36.8 percent on the year in 1999, the last Year of the Rabbit. In other bunny years, it gained 15.3 percent in 1987 and 14.2 percent in 1975, according to stock market analysts who are pinning their hopes on a better year after a difficult 2010.
Japanese stocks were battered this year by the yen’s advance toward a postwar record high of ¥79.75, partly because some investors took advantage of Japanese authorities’ inaction to stem the export-sapping yen’s strength. Worries about a possible spillover of the eurozone’s debt crisis to nations such as Spain also stayed at the forefront of investors’ minds.
The Nikkei fell to its lowest level of the year, 8,796.45, on Sept. 1, just two weeks before Japan intervened in the currency market for the first time in more than six years.
The benchmark index has seen a strong late-year rally from November through December, crossing the 10,000 threshold, with help from the Fed’s second round of monetary easing to support the U.S. economy, and the dollar’s recovery against the yen.
The dollar has risen close to the ¥85 line from around ¥80.20, a more than 15-year low logged in early November.
“U.S. long-term interest rates have been rising on hopes for economic recovery, and are expected to be on an uptrend, so the dollar is likely to be stronger against the yen,” said Yuji Kameoka, chief foreign-exchange strategist at Daiwa Institute of Research, predicting the dollar could rise to as high as ¥94.
“For 2011, the focus will be on how the United States will strike a balance between monetary easing and fiscal stimulus after much emphasis on the former this year. I’d expect the United States to put its weight more on the fiscal side with the U.S. presidential election in sight” in 2012, Kameoka said.
With the unemployment rate high at 9.8 percent in November, a tepid recovery in the U.S. job market could create a bottleneck. A strong U.S. economy is a prerequisite for the Tokyo Stock Exchange to perform well, given that export-linked shares, the driving force, are influenced by the dollar’s moves against the yen.
“Corporate earnings are expected to go back to some 70 to 80 percent of the levels seen before the Lehman shock, but shares haven’t been able to price in such a recovery due to the strong yen,” said Takashi Hiroki, chief strategist at Monex Inc.
Hiroki said that if the dollar’s uptrend continues, the Nikkei could rise to ¥14,500 in mid-2011 because companies won’t have to be so conservative with their earnings.
The growth of emerging economies will also be key, and financial markets are likely to focus on the pace of monetary tightening, as some analysts say overly aggressive tightening would affect investor appetite for riskier assets because it would work negatively for global economic growth.
The contrast was stark this year. The U.S., Japan and European nations tried to boost their economies by monetary easing. On the other side of the spectrum, emerging nations China and Brazil moved toward monetary tightening amid robust growth.
Analysts say the U.S. central bank will probably maintain its monetary easing throughout 2011, with the same true for the Bank of Japan. On the domestic front, the focus will be on how the government will take action to help the export-reliant, deflation-mired economy, a long-standing issue.
Some market analysts say they’ll pay attention to negotiations for possible participation in an expanded trans-Pacific free-trade pact.
Meanwhile, Masumi Yamamoto, market analyst at Daiwa Securities Capital Markets Co., remains cautious about the future course of the financial markets in Japan, noting that a lack of concrete action by the government to address deflation was one of the factors causing Japanese shares to lag behind globally.
“Whether Japanese companies will put capital to work for business investment will be an important factor to watch,” Yamamoto said.
“The external environment will likely be good on the whole, but I’m doubtful that foreign investors will have more incentives to hold Japanese shares (over other Asian shares). So the Nikkei’s rise will be capped around the 12,000 level at best.”
Masafumi Yamamoto, chief foreign-exchange strategist at Barclays Bank in Tokyo, meanwhile said the U.S. and Japan are going in the opposite direction from the eurozone and Britain, which have austerity measures in place.