With stocks wrapping up this year’s trading Friday at the highest year-end level in 26 years, the Tokyo Stock Exchange is poised to see another run-up in 2018 albeit with a far slower pace of gains, driven by growth in the global economy and corporate earnings.
The 225-issue Nikkei average ended down 19.04 points, or 0.08 percent, from Thursday at 22,764.94, its highest year-end reading since 1991.
Through the entirety of 2017, the Nikkei average gained 3,650.57 points, or 19.1 percent, extending its winning streak to a sixth year.
The outlook for what would be a seventh consecutive year of gains, however, could be complicated by potential political uncertainty in the United States and the effects of the push for tighter monetary policy by the U.S. Federal Reserve.
Analysts expect the Nikkei average to rise to around 25,000 — the highest close since 1991 and up almost 10 percent from this year’s close.
Some analysts project an even bigger surge to 29,000, while many analysts expect the index’s downside to be well supported at around 19,500.
The expected market rally in 2018 would mark the longest winning streak since 1989, when the Nikkei gained for the 12th straight year in the midst of the Japanese asset price bubble.
“I think the market’s Goldilocks environment will continue next year, with share prices neither soaring nor tumbling too sharply,” said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management Co., making a reference to the bowl of not-too-hot and not-too-cold porridge in the fairy tale of Goldilocks and the Three Bears.
Analysts expect solid growth in the global economy will continue to push Tokyo stocks higher into 2018, analysts said.
The Organization for Economic Cooperation and Development said in November the global economy will expand 3.7 percent in 2018 following 3.6 percent growth estimated for 2017, as it raised its outlook for the U.S. and eurozone economies.
The upbeat economic outlook along with the expected weakness for the yen will help Japanese companies post another record profit in the new year, analysts said.
The dollar is forecast to trade between ¥95 and ¥120 in 2018, compared with around ¥113 in late December, analysts said.
“With a global economic expansion, Japanese companies will likely keep double-digit growth” in fiscal 2018, said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities Co.
The U.S. tax overhaul legislation enacted late in 2017 will also provide a boost to Japanese companies heavily dependent on the U.S. market such as Toyota Motor Corp. and Sony Corp. as well as construction machinery manufacturer Komatsu Ltd.
U.S. President Donald Trump signed a $1.5 trillion tax bill into law, the biggest tax overhaul in 30 years. The law, which will slash taxes for corporations and the wealthy from 2018, is also expected to prompt some companies benefiting from the tax breaks to buy back their own shares, some analysts said.
The Bank of Japan’s monetary policy will also drive Tokyo stocks higher. The BOJ should continue to purchase exchange-traded funds, as the central bank is expected to maintain its monetary-easing policy amid weak inflation, Fujito said.
The Nikkei index “will likely reach 25,000 in May, hitting the highest level for the coming year,” he said.
Analysts list the high-tech sector as one of the biggest gainers in 2018, driven by solid demand for semiconductor products for use in electric vehicles. Some retailers are also likely to see an upswing on the back of the increasing number of foreign visitors to the country, they added.
Still, analysts said investors need to be cautious about the market in the latter half of 2018.
Investors will likely start gradually factoring in a possible defeat of Trump’s Republicans in the U.S. midterm elections in November, with the Nikkei possibly dropping below the psychologically important 20,000 line.
“Following the passage of the tax reform bill, political conflicts between Republicans and Democrats will become clearer toward the midterm elections,” said Yutaka Miura, senior technical analyst at Mizuho Securities Co.
The conflicts may hamper Trump’s efforts to push through other policies such as his long-promised plan to boost investment in infrastructure, which is scheduled to be announced in January, Miura added.
The Fed’s monetary policy may also drag U.S. stocks down and then dent Japanese stocks, analysts said.
The U.S. central bank raised interest rates three times in 2017 and is expected to carry out another three hikes in 2018. Higher borrowing costs can discourage companies from spending more to expand their businesses.
Among other risk factors will be a slowdown in the Chinese economy that may come earlier than expected, more terrorism and conflicts in the Middle East after Trump recognized Jerusalem as the capital of Israel, and missile tests by North Korea, analysts said. Even so, Ichikawa said the Tokyo market has a chance of maintaining a relatively firm tone following the release of strong earnings for the fiscal first half through September.
“The market will be pushed up again by optimism about earnings for the whole fiscal year,” he said.
According to a traditional Japanese stock market proverb, the market in 2018 — the Year of the Dog in the Chinese zodiac — is considered a good year for stocks but likely to involve the risk of volatility.
“Although the weather is fine, the waves are high… there will be scattered rain,” Miura said.