While traditional investment wisdom holds that the market will be volatile in 2017, Tokyo stocks will likely continue the current “Trump rally” this year, although at a mild pace, supported by a weaker yen and solid corporate earnings.
The course of the stock market in the Chinese zodiac Year of the Rooster is expected to be mainly affected by the economic policies of the incoming administration of U.S. President-elect Donald Trump.
Strong hopes for so-called Trumponomics, a major driving force of the ongoing market upsurge, may dim somewhat after his inauguration on Jan. 20, analysts said.
If his specific policies prove to be realistic and beneficial to the U.S. economy, however, the Tokyo market may see a second round of the Trump rally, resulting in a gradual rise in the latter half of 2017, they said.
Many analysts believe that the benchmark 225-issue Nikkei Stock Average is likely to move between 17,000 and 22,500 in 2017.
“In 2017, Tokyo stocks will likely carry over the current upbeat momentum on favorable corporate results pushed up by the yen’s depreciation,” said Makoto Sengoku, a market analyst at the Tokai Tokyo Research Institute.
Since Trump’s victory in the Nov. 8 U.S. presidential election, hopes that he will implement tax reform, boost infrastructure spending and promote deregulation have contributed to the U.S. dollar’s advance against the yen.
The dollar has also received a boost from the Federal Reserve’s interest rate hike on Dec. 14, the first in a year, when the central bank signaled a faster pace of rate hikes in 2017. The Bank of Japan, meanwhile, left unchanged its 10-year government debt yield target at around zero percent at its policy meeting through Dec. 20.
Given the widening gap between U.S. and Japanese interest rates, it would be difficult to anticipate that the dollar will weaken against the yen in 2017, Sengoku said. “Japanese companies are expected to improve their earnings results substantially thanks to further weakness of the yen.”
The dollar is widely forecast to trade between ¥105 and ¥124 in 2017, according to analysts and dealers.
Sengoku said that if Trump implements infrastructure investment, transportation equipment and machinery issues are expected to gain ground, reaping a windfall from a weaker yen. Bank shares, especially of those with units in the United States, could also benefit from financial sector deregulation under Trump, he said.
In contrast, pharmaceutical shares may face selling pressure as Trump has suggested a possible cut in drug prices, and electricity and gas issues are also likely to be on a downward trend amid higher crude oil prices, he added.
Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management Co., said, “The current trend of a soft yen and higher stock prices is expected to hit its peak around the beginning of next year.
“When investors see the specific amount of fiscal stimulus by Mr. Trump after his inauguration, the current strong hopes may wither somewhat, slowing down the pace of stock price rises,” Ichikawa said, while adding that stock prices are likely to pick up again slowly toward the latter half of 2017.
Ichikawa said Trump is expected to adopt “unexpectedly realistic” policies, without pursuing massive fiscal stimulus, as doing so could result in huge budget deficits.
“Unlike 2016, when Tokyo stocks soared toward the year-end after falling sharply earlier in the year, stock prices are expected to move more moderately in 2017,” he said.
Yutaka Miura, senior technical analyst at Mizuho Securities Co., said, “Tokyo stocks may fall shortly after Mr. Trump takes office as there is a possibility that some of his inaugural remarks will be seen as selling factors.
“The market is now seeing the first round of a Trump rally, but the rally may enter a second round on rekindled hopes for Trumponomics, resulting in a rise in Tokyo stocks around May,” Miura added.
Analysts and brokers said the possible withdrawal of funds from emerging economies amid higher U.S. interest rates and concerns over political uncertainty in Europe will be among the risk factors for the stock market in 2017.
A number of elections will be held in Europe in 2017, including a general election in the Netherlands, a presidential election in France and a federal election in Germany.
“Fears of exits from the European Union could surface again if parties opposed to the bloc win elections and that would be a negative factor for the market,” Sumitomo Mitsui Asset Management’s Ichikawa said.
The Nikkei index plunged over 1,000 points in late June, its sharpest fall in more than 16 years, after Britain voted in a referendum to leave the European Union.
Despite such risk factors, it is unlikely that global financial markets will see severe turmoil in 2017 and Tokyo shares are expected to gradually turn up toward the end of the year, he said.
Stocks’ downside will likely continue to be underpinned by purchases of exchange-traded funds by the BOJ and corporate stock buybacks, analysts said, adding they expect the Japanese central bank to stand pat on monetary policy for the whole year.
A Japanese stock market aphorism states that markets are volatile in the Year of the Monkey and the following Year of the Rooster.
In 2016, the Year of the Monkey, the market was bumpy, with the Nikkei index trading above the 17,000 line at the beginning of the year, slipping below 15,000 in June and finishing above 19,000.
“It is likely that 2017 will be a relatively good year in terms of corporate earnings as well as the supply-demand situation in the market,” Tokai Tokyo Research Institute’s Sengoku said. “The market could leap, but in a good sense.”