Nikkei 225 forecast and analysis
By Dan Atkinson
14:18, 16 November 2020
Tokyo’s blue-chip Nikkei 225 index would appear to be staging a strong recovery despite a cloudy outlook for the world’s third-largest economy.
Trading at close to six-month highs, the Nikkei is showing sustained upward momentum, apparently unaffected by the departure on health grounds of long-serving prime minister, Shinzo Abe.
It seems also to have shrugged off the relative failure of Abe’s economic policies to drag Japan out of many years of stagnation.
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Inflation is sluggish
This morning, the Nikkei was 0.53 per cent down at 25,285.87, still well up on its level of a month ago – on October 13, it traded at 23,601.78. Its low for the month was seen on October 30, at 22,977.13, while its high was reached on November 12, at 25,520.88.
Six months ago, on May 13, it stood at 20,267.05, and its six-month low point was reached on the following day, May 14, at 19,914.78. The high point was, again, on November 12.
The list of the index’s constituents reads like a who’s who of Japanese industry and includes Mitsubishi Electric, Nissan, Toyota and Panasonic. Japan’s export success is a key factor in the economy, which is probably a good thing given that domestic growth is set to be weak.
In its most recent World Economic Outlook, the International Monetary Fund (IMF) reported expansion of 0.7 per cent last year, against a 1.2 per cent average for “advanced Asia”. For this year, the IMF is forecasting a drop of 5.3 per cent noticeably worse than the average forecast of minus 4.2 per cent for “advanced Asia” and for next year, the forecast is for growth of 2.3 per cent against 2.9 per cent for advanced Asia.
Inflation, yesterday’s global problem that is now seen as part of the solution to the threat of Depression-era economics, is also seen as lagging that of the advanced-Asia average, with prices rising at 0.5 per cent last year against the average 0.7 per cent with a forecast of minus 0.1 per cent this year against an average of 0.2 per cent and 0.3 per cent next year against 0.7 per cent.
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Abe’s ‘three arrows’
Even Japan’s fabled current-account surpluses look to be below average, at 3.6 per cent of gross domestic product last year, against an average of 4.3 per cent with forecasts of 2.9 per cent this year against an average of 3.6 per cent and 3.2 per cent next year compared with an average of 3.5 per cent.
Only in the employment market is Japan set to come out ahead. The IMF has the average unemployment for advanced Asia last year at 3.1 per cent of the workforce and for Japan at 2.4 per cent. Its forecast for this year is for an average of 4 per cent and 3.3 per cent for Japan and an average of 3.5 per cent next year and 3.2 per cent for Japan.
But for critics of Japan, even the buoyant labour-market numbers are not entirely good news, as they are said to reflect, in part, the rigid employment practices that Abe was supposed to be dismantling.
His “three arrows” intended to revive the economy comprised loose fiscal policy, an ultra-accommodative monetary stance and structural reforms to make the economy more responsive. Abe was the latest Japanese leader to grapple with the legacy of the bursting of the financial and stock-market bubble at the start of the Nineties, after which growth stagnated and the country was said to be undergoing a series of “lost decades”.
It was a remarkable fall in stature for an economy that had been widely admired and even feared – in the 1993 American film Rising Sun, ruthless Japanese business people are depicted outwitting their US rivals. Western bookshops in the Seventies and Eighties stocked plentiful volumes telling firms how to imitate the Japanese way of doing things, from “just in time” supply chains to “quality management”.
Stocks are leading indicator
Stocks and property prices boomed. At one point, the share price of the communications group Nippon Telegraph and Telephone was discounting profits centuries into the future, while tennis club membership became so expensive that, to cut costs, several sets of players would share one court.
Once the bubble burst, many western commentators concluded that all the great virtues of the Japanese economy were, in fact, serious flaws: its reliance on exports, its consensual management style, its close relationships between banks and industry and its settled political system in which the Liberal Democratic Party has held power for all but five years since 1955.
Its ethnic homogeneity, controversially cited in the Eighties by then Prime Minister Yasuhiro Nakasone as a reason for the country’s economic success, was now seen as a terrible drag on growth, because immigration controls prevented what is an ageing society from importing younger, foreign workers.
Japan’s only way out of the rut into which it had fallen, it was said, was to become much more like a “normal” Group of Seven economy – or rather, to become more like the US and UK, with strong reliance on consumer spending as opposed to exporting. This, in a sense, was Mr Abe’s project, including his emphasis on greater involvement by women in the labour market.
For the Nikkei 225, the current upward momentum is a reminder of two things. One is that the stock market is a leading indicator, pointing forwards not back. The second is that, for all the talk of stagnation, Japan’s remains a powerful economy delivering very high living standards.
Any Nikkei 225 forecast ought to suggest that the momentum will be sustained into next year.