Nikkei On The Ropes
One stock market that has really underperformed global equity markets in recent months is Japan’s Nikkei index. While other developed markets have rallied by over 50.0% since the March lows, and some EMs by around 200%, the Nikkei has only recovered by around 35.0%.
The price action has turned lower and is starting to form a minor downtrend. With overhead resistance coming in around the 10,000 mark, key support exists at 8,250, as shown in the accompanying chart. If this latter level were to give way, Risk Watchdog can envisage the market dropping quickly to the 7,000 region.
On the fundamental side, as my colleagues at BMI pointed out earlier this week, Japan’s real GDP growth surprise of 1.2% q-o-q in Q309 (4.8% annualised) masks an ongoing contraction in nominal output. I don’t expect nominal GDP, in yen terms, heading back to 2007 levels until 2013, leaving the economy only 0.5% bigger at current prices than in 1997. BMI is forecasting long-term growth of between 1.0-1.5%, due primarily to serious demographic factors at play. Japan’s population has peaked and is set to decrease from 127.6mn in 2008 to 123.3mn in 2019, according to my colleagues’ projections – and down to 95.1mn by 2050, according to Japan’s National Institute of Population and Social Security Research. The ‘greying’ of the population will also hurt potential output, with over-65s projected to increase their share of the population from 17.4% in 2000 to 29.2% in 2020 and 39.6% in 2050. Given these dynamics, it would require a massive increase in productivity growth to offset the decline in the labour force and justify real GDP growth above 2.0% In fact, Japan may be content to have near-zero real growth, which even in the absence of inflation, would still equate to increasing per capita wealth. However, stagnant nominal GDP growth will serve to exacerbate the government’s debt burden.