NIKKEI225 Under Stress Due to Strong Yen Despite Global Bullishness

The yen reaches a 3 year high of 149.57 overnight damping the attractiveness of Japanese stocks.

The USD/JPY trades lower overnight as the market continues betting on a bumper 50 basis point cut from the Fed. The expectation of a big move by the Fed is measured clearly by the Fed Funds futures.

The CME FedWatch tool calculates a 67% probability of a 50bp cut at the end of the FOMC meeting tomorrow. The sentiment has given most global markets a lift, the FTSE is up 0.32% and the NAS100 is up [[0.35]].

The NIKKEI225, down 1.17%, is battling the positive effects of Fed monetary loosening and the constrictive factor of a strong yen. A strong yen not only makes stock valuations less attractive for foreign investors, but it also reduces Japanese exports.

Foreign stock investments decreased by ¥902.3 billion for the week ending September 7. The largest decline since March 2024, the NIKKEI225 dropped 9.95% during the same week.

BoJ Policy

While global stock benefit from looser monetary policy lead by the Fed, the Japanese stock market is hindered by a BoJ tightening cycle. A strong enough economy may still see the market rally, especially if the global economy is expanding.

However, the BoJ has been talking of raising rates to a neutral level of 1% and the timing of that policy remains to be seen. Inflation is still above the central bank’s target of 2%, while the economy is only marginally improving.

The GDP Growth rate for Q2 2024 showed 0.7% expansion QoQ, less than the expected 0.8%. While Annualized GDP Growth did increase by 2.9% for the same quarter, it was less than forecasts of 3.2%.

Going forward, the performance of the NIKKEI225 compared to its peers will depend greatly on BoJ’s timing for interest rate normalization. We have seen the reassuring comments from the BoJ after the last hike.

But we have also seen how various central bank officials have made statements that further interest hikes are to follow to curb inflation pressures.