Tokyo stocks will likely maintain their upward momentum in 2015 largely thanks to the weakening yen, which sharpens Japan Inc.’s competitive edge.
Wage hikes urged by Prime Minister Shinzo Abe and the possibility of additional monetary easing by the Bank of Japan are also expected to support the stock market, although an interest rate hike in the United States could trigger a correction, economists and brokers said.
The benchmark Nikkei 225 stock average is forecast to end up between 18,000 to 20,000 at year’s end, with some even projecting it to hit 21,000. The Nikkei finished 2014 at 17,450.77, its highest year-end close in 15 years.
By the end of 2015, the dollar is likely to be changing hands at between ¥125 and ¥130, compared with around ¥120 on Dec. 30. The euro is expected to trade between ¥140 and ¥160, dealers said.
“The basic view is that Tokyo stocks will ride the upward trend on the back of improving corporate results. The weaker yen is prone to benefit Japanese firms, particularly exporters,” said Hisao Matsuura, senior strategist at Nomura Securities Co.
By sector, automakers, electric machinery makers and precision instrument manufacturers are expected to rank among the top performers, Matsuura said.
The yen is also likely to keep falling this year. In December it hit a seven-year low around ¥121.
The diverging monetary outlooks of the U.S. Federal Reserve, which is on track to tighten policy, and the BOJ, which is likely to stay ultra-loose, will be the chief reason behind the dollar’s strength going forward, dealers said.
Abe has been urging business circles to hike wages to end the slump in domestic consumption caused by a tax hike in April and his effort to stoke inflation.
“Next year will see domestic demand-related stocks such as retail and services gaining advantage from wage hikes,” said Ryota Sakagami, chief equity strategist at SMBC Nikko Securities Inc.
Overseas investors are paying attention to Abe’s growth plan and his structural reform promises — the elusive “third arrow” of his deflation-busting Abenomics program — since he won the snap election he called in December.
They are especially keen to see him follow through on changes to labor law and farm policy.
The nationwide local elections this April will offer a chance for Abe to demonstrate his willingness to support rural economies that are being passed over by Abenomics, which also entails radical monetary easing and big fiscal spending, Matsuura said.
The stock market’s downside will likely stay solid thanks to the impending entry of the nation’s giant public pension fund and ongoing support from the central bank. The moves have draw fire for turning Japan into a “government-made market.”
The Government Pension Investment Fund is raising the amount of domestic stocks and foreign bonds in its investment portfolio. The BOJ accelerated purchases of exchange-traded funds under additional monetary easing taken in October.
Kengo Suzuki, chief foreign exchange strategist at Mizuho Securities Co., said the BOJ will likely be forced to conduct another round of easing in the October to December quarter as it doggedly pursues its 2013 target of stoking 2 percent inflation in two years.
Some analysts, however, said an interest rate hike in the United States, possibly in the middle of the year, might create a risk-averse mood in global markets and spark sell-offs of Japanese shares.
“I’m afraid of a downward correction by the dollar, rather than further gains,” said Minori Uchida, head of Tokyo global market research at the Bank of Tokyo Mitsubishi UFJ, warning of a possibility of a temporary drop to ¥110 despite the mostly bullish outlook.
“A U.S. interest rate hike could bring about instability to stock markets, oil prices and emerging nations,” encouraging buying of the yen, which is deemed a relatively safe haven, he added.
“We should pay attention to instability in emerging markets and Europe around the April-June quarter. Coupled with a stock market correction prompted by the U.S. interest-rate hike, that season might be bad timing for the global economy, with the Nikkei index briefly falling below 17,000,” Sakagami added.