The Nikkei 225 continued its upward trend for the sixth consecutive week, closing at ￥30,808.35, with an increase of ￥1,420.05 (4.83%) from the previous week. It marked a seven-week winning streak, with no losses throughout the week. While the announcements of financial results for the January-March quarter had concluded at the beginning of the week, the momentum of Japanese stocks, particularly in the main stocks of the Tokyo Stock Exchange Prime Market, continued to rise without interruption. The Nikkei 225 recovered the ￥30,000 level by midweek and reached a new high after the burst of the bubble in the Japanese economy by the weekend.
Foreign investors have been increasing their allocation of assets to Japanese stocks through a process of elimination. This trend has been influenced by several factors, such as the Tokyo Stock Exchange’s request for improvement in the Price-to-Book Ratio (PBR) falling below 1, prominent American investors expressing interest in Japanese stocks, and the Bank of Japan continuing its monetary easing policies. Furthermore, some voices suggested that the political reform expectations, due to the significant progress of the Japan Innovation Party in local elections and the increased interest in Japan related to the G7 Hiroshima Summit of the leaders of advanced countries, acted as tailwinds, enhancing the mood for Japanese stock investments.
In addition to Prime Minister Fumio Kishida’s meeting with semiconductor giants from the United States, Taiwan, and South Korea to request investments in Japan, there were reports that Micron Technology, with support of 200 billion yen from the Japanese government, plans to mass-produce next-generation DRAM at its Hiroshima factory. Positive reports regarding semiconductors continued to emerge, driving high-tech stocks, particularly those related to semiconductors, to influence the index. Furthermore, there was a tailwind in the exchange rate, as the Japanese yen weakened by more than ¥3 against the US dollar compared to the previous week. This led to increased buying in transportation equipment and other sectors.
Focusing on the U.S. debt ceiling issue and NVIDIA’s financial results.
Will the Tokyo stock market encounter a pause in its upward trend next week? The rise of the Nikkei 225 shows no signs of stopping. It is truly impressive, considering the lack of significant clues and the completion of financial results announcements, as well as the calculation of the May options trading special clearing index (SQ). The background factors behind this include the Tokyo Stock Exchange’s request for improvement in the PBR, prominent American investor Warren Buffett’s announcement of additional investments, and the continuation of additional monetary easing under the new Bank of Japan. The outperformance of Japanese stocks compared to global stocks is currently evident. Some suggest that the risk of not holding Japanese stocks should be acknowledged.
However, the rise is exceeding the speed limit, and achieving new highs after the burst of the bubble undoubtedly brings a stronger sense of accomplishment. Furthermore, the number of advancing and declining stocks in the Tokyo Stock Exchange Prime Market has been nearly equal since midweek. The rise of top-contributing stocks, including high-priced stocks, has been leading the index. This indicates a shift from the previous trend dominated by spot trading to futures-driven movements, which is also a concern. In fact, futures trading volume has surged since the 18th. Although a pause is anticipated, it would be prudent to prepare for at least a potential temporary halt or even a significant adjustment in the near future.
Concerning the issue of the U.S. federal government’s debt ceiling, which initially showed signs of optimism, negotiations were temporarily suspended over the weekend, and reports indicated a significant gap remained in reaching an agreement. European and American foreign securities firms have pointed out that the U.S. Treasury Department may run out of cash and special measures by early June under the statutory federal debt limit. As “X-day” approaches, market volatility is likely to increase if there is little progress in debt ceiling negotiations. In such a scenario, yen-buying as a risk-averse strategy could potentially influence the adjustment of Japanese stocks.
On the other hand, the remarks made by Federal Reserve Chairman Jerome Powell over the weekend bring a sense of reassurance. This week, regional Federal Reserve Bank presidents made remarks suggesting not only a rate cut but also the possibility of additional rate hikes. These statements compelled the market to reassess its expectations, which had previously anticipated a pause in rate hikes after the May meeting. However, Chairman Powell highlighted the tightening impact on the economy resulting from credit contraction and hinted at a potential pause in rate hikes during the June meeting. As the June Federal Open Market Committee (FOMC) meeting approaches, the prospect of eliminating one source of market turbulence provides additional support.
Next week, on the 23rd, the U.S. Purchasing Managers’ Index (PMI) for May will be published. The economic indicators released in the United States this week have generally been positive, fostering heightened expectations for a soft landing of the economy. PMI is regarded as a leading economic indicator. If the results fall below expectations, it has the potential to revive concerns about an economic downturn. This is particularly significant considering that market expectations for further rate hikes have already diminished following Chairman Powell’s comments.
Additionally, on the 24th, the minutes of the FOMC meeting held on May 2-3 will be published, and on the 26th, the U.S. Core Personal Consumption Expenditures (PCE) Deflator for April will be released. If the minutes confirm a further leaning towards the Federal Reserve’s stance of rate hike pause, it will serve as a supporting factor for the stock market. Moreover, considering that previous inflation indicators have generally fallen below expectations, a mild result is expected for the April PCE Core Deflator.
Considerable attention on key economic indicators such as May’s Consumer Price Index (CPI) and the U.S. Core Personal Consumption Expenditures (PCE) Deflator
Next week, the following events are scheduled:
- On the 22nd, the release of Machinery Orders for March.
- On the 23rd, the publication of Nationwide Department Store Sales for April, U.S. Manufacturing PMI for May, and U.S. New Home Sales for April.
- On the 24th, the availability of the FOMC Meeting Minutes.
- On the 25th, the release of the Revised U.S. GDP for the first quarter of the year.
- On the 26th, the publication of the Consumer Price Index for the Tokyo Metropolitan Area for May, U.S. Core Personal Consumption Expenditures Deflator for April, and U.S. Durable Goods Orders for April.