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Yen-negative factors to drive Tokyo stocks in ’13

by Hiroki Noda and Megumi Iizuka

Kyodo

Tokyo stocks will likely test multiyear highs in 2013 if the yen continues its recent downward trend on expectations for monetary easing from the Abe government and continued signs of recovery in major economies.

Market analysts predict the Nikkei stock average, which broke the 10,000 threshold in late December, will move between 9,000 and 12,500 this year while the dollar, which was trading at a 27-month high in the ¥85 range at the time, will move between ¥78 and ¥93.

The euro is likely to move between $1.1800 and $1.3600, and between ¥97 and ¥122, the analysts said.

The Nikkei has been the world’s best-performing stock index since mid-November, when it surged about 18 percent amid hopes for massive fiscal spending and yen depreciation by force under the leadership of Shinzo Abe.

The new prime minister, who took office Wednesday, has pledged to keep the yen from strengthening to help out exporters, boost spending on public works projects by forcing the central bank to buy special construction bonds, and pull the country out of deflation by forcing the yen down.

Morgan Stanley MUFG Securities Co. thinks the dollar might reach as high as ¥92 by the first quarter of 2014 while the yen’s fall drives Japanese stocks higher.

“Anticipation of a weaker yen will continue to be the primary and likely positive driver (for stocks) in the first half of 2013,” said Yohei Yamada, Japan equity strategist at Morgan Stanley MUFG Securities.

“In the second half of 2013, expectations for an ‘exit from deflation’ will start to move the market,” he said.

The United States and China, the world’s two largest economies, are expected to pick up in 2013, while European Central Bank President Mario Draghi has said the eurozone is on track for a recovery in the second half of the year.

If that is the case, global investors are expected to increase their exposure to riskier assets, such as stocks.

“A strong yen was a major drag for Tokyo stocks over the last three years, but now the investment climate has improved significantly due to the dollar’s rise toward ¥90,” said Masatoshi Sato, chief strategist at Mizuho Investors Securities Co.

“There was a string of downward revisions in Japanese corporate earnings estimates in 2012, but 2013 may see more upward revisions,” Sato said.

Market analysts also say Japan will not only need aggressive monetary easing by the central bank but also government measures to support economic growth in its fight against deflation.

On Thursday, the Nikkei climbed to its highest since March 11, 2011, the day the country was struck by a massive earthquake and tsunami, trading above 10,300.

The blue-chip index peaked at 10,857 in 2011 and at 11,339 in 2010.

Nomura Securities Co. expects the Nikkei to regain upward momentum in the second half of the year after setting its low during the April-June quarter, when many companies release their annual earnings reports and estimates for the following year.

“We believe earnings guidance will not be encouraging, so it’s going to be a weak quarter,” said Takashi Ito, equity market strategist at Nomura Securities. “But stocks will begin to rise again in the second half as the Japanese economy improves.”

Japanese businesses in China were dealt a serious blow after the central government outbid the Tokyo Metropolitan Government for three of the Senkaku Islands in September, triggering riots across China, which claims the five islets along with Taipei.

A wide range of companies have taken measures to make up for the sluggish sales in China, but there is no quick fix.

“Companies may have to remain patient for a few more quarters,” Nomura’s Ito said. “The situation in China won’t be bad forever.”

While most analysts remain bullish on Japanese stocks, there is a view that expectations are too high for the Liberal Democratic Party-led government, which won by default and faces an Upper House election in July.

“The highly probable rise in the influence of the LDP on monetary policy is very helpful as Abe has made the defeating of deflation his top commitment,” Credit Suisse AG said in a recent global equity strategy report.

“However, our Japanese economists believe investors are too optimistic on the pace of change and that any change in the Bank of Japan Act will not be presented until the third quarter of 2013.”

Abe has said he will consider revising the BOJ law if the central bank does not adopt an inflation target of at least 2 percent at its policy meeting in January.

Overall, any positive scenario for the Tokyo market is based on the assumption that U.S. and European stocks perform well.

“If global investors don’t have enough risk appetite, they are unlikely to put money into the stock market,” Mizuho Investors Securities’ Sato said.

Meanwhile, the uptrend in the dollar, which entered the ¥85 zone on Wednesday, is expected to continue in 2013, spurred by a global economic recovery and speculation about the BOJ’s aggressive monetary easing measures, currency analysts said.

Many of them said concern over the “fiscal cliff” of hefty U.S. tax hikes and spending cuts is expected to recede at the beginning of 2013 because the negotiations in Congress are unlikely to disintegrate.

After overcoming the fiscal deadlock, “the U.S. economy is expected to pick up in line with a better investment and employment situation, which had been restrained by the fiscal cliff concerns,” said Yuji Kameoka, chief foreign-exchange strategist at Daiwa Securities Co., adding it will support the world economy.

On the domestic side, Abe’s pledge to pick someone who agrees with setting an inflation target of 2 percent as a successor to outgoing BOJ Gov. Masaaki Shirakawa is likely to continue weighing on the yen, they said.

“The expectation about the LDP’s policy to seek aggressive monetary easing will probably last for some time as the new administration wants to maintain support ratings until the House of Councilors election next summer,” said Junya Tanase, chief foreign-exchange strategist at JPMorgan Chase Bank.

Japan’s trade deficit is another factor that will cause the yen to slide against the dollar this year, said Koji Fukaya, currency strategist at Office Fukaya, a currency research and consulting company in Tokyo.

“In 2012, the yen attracted buying amid a deteriorating global economy, but as the U.S. and European economies are expected to pick up, Japan’s ongoing trade deficit will draw more attention,” Fukaya said.

Meanwhile, some dealers expressed caution about the overly exaggerated expectations for aggressive monetary easing by Japan, saying the U.S. currency could fall again if those expectations are not fully met.

Although unlikely, the possibility remains that the United States will jump off the fiscal cliff and reverse the dollar’s upward momentum, so the development of this issue will be key in predicting the rest of the year, they said.

Dealers said the eurozone debt crisis and China’s decelerating economy, which tempered traders’ risk appetite in 2012, are likely to take a turn for the better because another tranche of bailout funds for Greece was approved in 2012 and the Chinese economy is showing signs of recovery.

Market participants will keep a close watch on the general elections in Italy this spring and in Germany in the fall because the euro may fluctuate on political uncertainties, they said.