The Nikkei 225 has fallen 18% since the beginning of May. The Japanese equity market is struggling with currency deflation paired with low levels of economic growth and structural economic issues with population growth. Despite all of these issues there is a narrow window of opportunity for buying Japanese equities.
Short-term pull-back followed by currency depreciation
Some believe that weak economic data in the short-term means that Japan’s monetary policy isn’t working. Others worry about too much expansionary monetary policy, and how it could overstimulate growth, causing an abrupt end to open market operations.
The recent weakness in Institute for Supply Management (ISM) data will only encourage the Bank of Japan to increase its inflationary asset purchases. Any weakening economic indicator will be met with a serious round of liquidity injections into the economy.
Some speculate that currency manipulation will end soon. However, Central Banks are slow to raise interest rates. For example, following the economic crash in 2008, the Federal Reserve kept interest rates near 0% before raising them.
The Nikkei 225’s decline is having a significant impact on investor sentiment across the world. The effects are cascading across stocks listed on the Nikkei 225. The reasoning for this decline is because of the sudden 3% decline in the value of the dollar relative to the yen.
The Federal Reserve has increased the total amount of assets on its balance sheet by 362.10% over the course of ten years. Comparatively speaking, the Bank of Japan has increased the size of its balance sheet by 39.46% over the same period. The Bank of Japan is trying to play catch-up with the Federal Reserve.