The 35% Nikkei 225 round-trip: There and back again


Very close to exactly two months ago, we perhaps flippantly remarked that Goldman Sachs raising its target for the Nikkei 225 might be an excellent contrarian signal. The full piece can be found here:

A week later we suggested that markets were getting a bit frothy, especially with regards to margin buying. The full piece can be found here:

As it turned out we were slightly early in calling the short term top of the market, as it steamed on ahead to close at 15,627 on the 22nd of May. Since then the Nikkei 225 dropped around 20%.

Overall, this leaves us back almost exactly where we were when we made our comment about Goldman Sachs’ outlook for the market. In other words, we have completed a 35% round-trip on the Nikkei 225, leaving us back around 13.300. The vertical line in the chart below indicates the 12th of April when we posted our initial comments.

Nikkei 225 - 2

Yesterday, Goldman Sachs’ Kathy Matsui was again interviewed by Bloomberg and asked to comment on the Japanese market in general and the disappointing machinery orders for April (-8.8% MoM and -1.1% YoY) in particular. Goldman Sachs’ 12 month Nikkei 225 target is 17,000, so fundamental signals such as machinery orders probably needs to pick for that to be achieved, especially if global investor concerns about Fed ‘tapering’ remain.

The basic message seems very much to be a cautiously bullish one, although we feel the emphasis on improved consumer spending is premature, given the fear of an impending rise in consumption taxes.

However, we do strongly agree with Matsui’s point that corporate Japan, by ‘virtue’ of its very low profitability levels, is extremely highly operationally geared and so is able to exhibit very substantial profit growth even if the top line only grows marginally. The only caveat here are the rising input costs that corporate Japan is now suffering under as a direct result of the BoJ’s QE and the resultant weakening of the Yen.

Both the issue of what appears to be improved consumer spending and the point about rising input costs for corporate Japan (especially the manufacturing sector) is discussed in more detail here:

At any rate, we thought we would present this interview as well, in the interest of fair and balanced analysis.

Should we be bullish again in the short term, now that Goldman Sachs is sounding a bit more more cautions? NipponMarketBlog finds itself wondering if the market is capable of a small rally in the short term given the recent market correction, the increasing likelihood of some sort of bounce in the JPY/USD, and the prospects for of an increasingly worried government possibly providing more detail on its much needed ‘Third Arrow’ in the Abenomics quiver.


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