Japan shares tumble on emerging market fears, but analysts stay optimistic

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Japan’s benchmark Nikkei 225 fell sharply for a second straight session Monday as investors continued to feel uneasy from a sell-off in emerging market currencies. But few expect the rout to continue.

“The fact that the Nikkei has stabilized is good, but they have to make economic reforms in order to reignite the economy,” Andrew Busch, foreign exchange analyst, said in an interview Monday.

On Friday, emerging-market assets were hit by concerns over China’s slowing economy, as well as political disputes in Turkey, Argentina and Ukraine.

Investors poured into so-called “safe haven” currencies, including the Japanese yen, sending the currency up 2 percent to 104.52 on Friday. As of Monday’s New York close of 102.55, the yen had risen 2.6 percent so far in 2014.

Despite the recent strength, many expect the currency’s downtrend to resume. Busch said he believes Japan’s central bank would like to see a further weakening.

“If they get anywhere between 110 to 115, they will be extremely happy and that’s my target,” Busch said.

If that happens, strategists predict Japan’s stock market will resume its upward trend.

“It is hard to think of a major stock market that is more tied to the success of its currency in almost a one-for-one relationship,” said John Blank, chief equity strategist at Zacks Investment Research.

“If the yen goes from 102 to 107 over two months, it would spell at least a plus 5 percent move in the Nikkei too.  If the yen stalls, so will Japan’s stocks,” Blank said.

The Bank of Japan announced after a two-day meeting last week that it was confident it could hit higher inflation rates without new “easy money” policies, maintaining its monetary base at an annual pace of 60 to 70 trillion yen with a target inflation rate of 2 percent.

The third largest economy in the world has struggled to jump start growth for years and has accrued one quadrillion yen, or $10.46 trillion, in debt. Japanese Prime Minister Shinzo Abe created a plan, Abenomics, to enforce aggressive quantitative easing and massive government spending to stimulate growth in the economy.

The yen’s weakening has supported Japanese manufacturing export companies, such as Toyota and Sony.

“They’re driving the stock market up,” Blank said. “What’s called quantitative easing in Japan has three components: currency, equity and bonds. They are doing manipulation of all three markets. They’re even buying real estate ETFs.”

The Nikkei 225 closed at a six-year high in 2013, and is up 41 percent from a year ago, but the blue-chip index is still 60 percent below its all-time high of 39,000 in 1989 at the peak of the country’s asset price bubble. In 2014 so far, the Nikkei has fallen 8 percent.

But Scott Shellady, senior vice president of derivatives at the Trean Group, said investors could see further modest gains this year, but advised keeping a short-term investment horizon.

“You could still earn 12-15 percent,” Shellady said. “I think Japan’s in for some real trouble, but you’re going to make some money if you’re camping out for 12 months. Not five years.”

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