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▼ Takaichi's LDP Win May Send Nikkei To 50,000, But Uncertainty Looms
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The surprising selection of Sanae Takaichi as president of Japan's ruling party may further push up the Nikkei stock index to the 50,000 threshold, aided by a weaker yen as prospects of an imminent interest rate hike by the Bank of Japan recede.
The upward momentum of the key index, however, may be short-lived due to political uncertainty as fiscal dove Takaichi may find it hard to implement economy-supporting policies with her Liberal Democratic Party leading a minority government.
Boosted by optimism about expansionary fiscal measures, the Nikkei surged 4.75 percent Monday to end at a fresh record high at 47,944.76, while the Japanese currency plunged by around 3 yen against the U.S. dollar to hit a two-month low in the 150 level.
Recent advances of the Nikkei came after it sank to the 31,000 level in April due to concerns about higher U.S. levies before recovering as a Japan-U.S. trade deal in July to reduce auto and other tariff rates helped improve investor sentiment.
"The yen fell to 150 against the dollar and a further drop would increase the likelihood of the Nikkei reaching 50,000, considering the impact of a weaker currency on corporate earnings," said Makoto Sengoku, senior equity market analyst at Tokai Tokyo Intelligence Laboratory Co.
The yen could slide even more if concern about the U.S. economic outlook recedes due to additional monetary easing by the Federal Reserve and a U.S. government shutdown ends relatively soon, he said.
Solid corporate earnings are also likely to bolster the market, with the BOJ's latest Tankan survey showing confidence among major manufacturers improved for the second straight quarter.
"It's highly unlikely that corporate earnings will deteriorate and cause stocks to fall," said Koichi Fujishiro, senior economist at the Dai-ichi Life Research Institute.
The Japanese central bank is now seen as facing headwinds to pursue additional interest rate hikes at its policy meeting late October, as Takaichi has aired concern about the adverse impact of U.S. tariffs on the Japanese economy in the future.
Speculation about additional rate hikes had grown recently amid surging food and other prices, after two of the nine board members voted against leaving the policy rate unchanged at the last meeting in September.
"It is too early to assume deflation is over and feel relieved," she told a press conference Saturday after being elected as LDP chief, apparently signaling to the BOJ to be cautious about further rate increases.
"I will have to closely communicate with the BOJ" until inflation led by higher wages accompanied with expanding demand is achieved, she said.
Takaichi also said in a recent Kyodo News survey of LDP leadership candidates that the BOJ should keep intact its policy rate at around 0.5 percent, contrasting with the other four candidates, who refrained from commenting on whether it should raise or reduce rates.
Some analysts, meanwhile, warned the equities market may be dampened by the unclear political outlook given the ruling coalition of the LDP and Komeito lack a majority in either house of parliament.
"The sustainability of stock rises may not last so long" as it remains unclear how the ruling coalition will cooperate with other parties to implement policies, said Masahiro Yamaguchi, head of investment research at SMBC Trust Bank.
"The feasibility and scale of policies will become apparent if such issues are likely to be cleared, but it will take some time to reach that stage," he added.
Concerns over rising borrowing costs also linger, as expansionary fiscal policies such as more government spending and tax cuts would lead to further deterioration in Japan's fiscal health, which is already the worst among developed economies, brokers said.
The upward momentum of the key index, however, may be short-lived due to political uncertainty as fiscal dove Takaichi may find it hard to implement economy-supporting policies with her Liberal Democratic Party leading a minority government.
Boosted by optimism about expansionary fiscal measures, the Nikkei surged 4.75 percent Monday to end at a fresh record high at 47,944.76, while the Japanese currency plunged by around 3 yen against the U.S. dollar to hit a two-month low in the 150 level.
Recent advances of the Nikkei came after it sank to the 31,000 level in April due to concerns about higher U.S. levies before recovering as a Japan-U.S. trade deal in July to reduce auto and other tariff rates helped improve investor sentiment.
"The yen fell to 150 against the dollar and a further drop would increase the likelihood of the Nikkei reaching 50,000, considering the impact of a weaker currency on corporate earnings," said Makoto Sengoku, senior equity market analyst at Tokai Tokyo Intelligence Laboratory Co.
The yen could slide even more if concern about the U.S. economic outlook recedes due to additional monetary easing by the Federal Reserve and a U.S. government shutdown ends relatively soon, he said.
Solid corporate earnings are also likely to bolster the market, with the BOJ's latest Tankan survey showing confidence among major manufacturers improved for the second straight quarter.
"It's highly unlikely that corporate earnings will deteriorate and cause stocks to fall," said Koichi Fujishiro, senior economist at the Dai-ichi Life Research Institute.
The Japanese central bank is now seen as facing headwinds to pursue additional interest rate hikes at its policy meeting late October, as Takaichi has aired concern about the adverse impact of U.S. tariffs on the Japanese economy in the future.
Speculation about additional rate hikes had grown recently amid surging food and other prices, after two of the nine board members voted against leaving the policy rate unchanged at the last meeting in September.
"It is too early to assume deflation is over and feel relieved," she told a press conference Saturday after being elected as LDP chief, apparently signaling to the BOJ to be cautious about further rate increases.
"I will have to closely communicate with the BOJ" until inflation led by higher wages accompanied with expanding demand is achieved, she said.
Takaichi also said in a recent Kyodo News survey of LDP leadership candidates that the BOJ should keep intact its policy rate at around 0.5 percent, contrasting with the other four candidates, who refrained from commenting on whether it should raise or reduce rates.
Some analysts, meanwhile, warned the equities market may be dampened by the unclear political outlook given the ruling coalition of the LDP and Komeito lack a majority in either house of parliament.
"The sustainability of stock rises may not last so long" as it remains unclear how the ruling coalition will cooperate with other parties to implement policies, said Masahiro Yamaguchi, head of investment research at SMBC Trust Bank.
"The feasibility and scale of policies will become apparent if such issues are likely to be cleared, but it will take some time to reach that stage," he added.
Concerns over rising borrowing costs also linger, as expansionary fiscal policies such as more government spending and tax cuts would lead to further deterioration in Japan's fiscal health, which is already the worst among developed economies, brokers said.
- 7/10 19:48
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