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The stock market is always influenced by various factors, and investors are keenly attuned to these dynamics. Recent trends highlight the noteworthy event where the Nikkei average closed at ¥35,049, a 608-point increase from the previous day, setting a three-day streak of surpassing the post-bubble collapse peak. The surge in stocks can be attributed to a complex interplay of factors, including former Prime Minister Abe acknowledging the failure of “Abenomics,” the Noto Peninsula earthquake, and the impact of the Bank of Japan’s monetary policy.
Trends in the Nikkei Stock Average
What caught the attention of investors was the revelation that former Prime Minister Abe recognized the failure of “Abenomics,” causing ripples in the market and boosting stock prices. Consequently, the Nikkei average recovered to ¥35,000, a level not seen in approximately 34 years, with a three-day increase exceeding ¥1,600. According to market insiders, the occurrence of the Noto Peninsula earthquake led the government to implement significant fiscal measures, and the Bank of Japan’s continuation of unconventional monetary easing further pushed the yen lower, driving up the stock prices of industries such as automotive and trading companies.
The expectation supporting this stock rally is the anticipation of prolonged easing. However, looming ahead is the Bank of Japan’s potential policy normalization and how it might impact the market.
Bank of Japan’s Monetary Policy and Outlook for Normalization
The fluctuations in monetary policy always have a substantial impact on the market. Initial forecasts pointed towards the possibility of negative interest rate removal at the January Bank of Japan meeting, but the occurrence of the Noto Peninsula earthquake has shifted the timing for normalization to April.
Concerns have emerged about the difficulty of normalization in April, primarily due to the scheduled by-election in the Shimane 1st district of the House of Representatives. The anticipated resignations of parliamentary members could lead to a substantial number of by-elections, particularly if multiple members of the ruling Liberal Democratic Party resign due to allegations of secret funds or are under investigation for bribery. Financial experts suggest that if resignations increase and by-elections multiply, the Bank of Japan Governor may be compelled to postpone interest rate hikes just before the voting day to avoid potential negative impacts on stock prices and potential damage to the Kishida administration.
If April is bypassed, normalization may occur in June or July, coinciding with the release of the economic and price outlook report during the July meeting. The uncertainty surrounding the by-elections creates a complex scenario affecting the schedule for policy normalization.
Impact of Weakening Yen and Soaring Stocks
While a weakening yen and surging stock prices currently dominate the market, concerns persist about the extent of their impact. The expected continuation of a weakening yen and soaring stocks until summer brings temporary relief for investors. However, potential issues loom on the horizon.
The progress of a weakening yen might lead to a surge in import prices, affecting consumers negatively. Small and medium-sized enterprises may also experience cost pressures due to a weaker yen. According to Tokyo Shoko Research, there was a 2.1-fold increase in “Bankruptcy Related to Weakening Yen” cases in 2023 compared to the previous year, indicating the risks associated with a weakening yen.
Despite investor enthusiasm, the consequences of a progressing weakening yen include higher import prices and potential challenges for small and medium-sized enterprises.
Acknowledgment of “Abenomics” Failure and its Market Impact
The acknowledgment of the failure of “Abenomics” by former Prime Minister Abe has had a significant impact on the market. Particularly, Abe’s statements during an appearance on “Asaichi” hosted by Sōichirō Tahara created ripples in the market, diminishing expectations for “Abenomics” among some investors. This acknowledgment of failure became a factor contributing to the surge in stocks, introducing political uncertainty to the market.
The impact of the acknowledgment of “Abenomics” failure has been substantial, especially as expectations for the government’s economic policies waver. Investors are now cautious about future market trends amid the growing political uncertainty.
By-Elections and the Interconnection with Monetary Policy
The interconnection between by-elections and monetary policy introduces uncertainty to the market. The schedule of by-elections and parliamentary resignations may alter the timeline for monetary policy normalization. In particular, ongoing issues like allegations of secret funds or bribery leading to the resignation of parliamentary members are impacting the political landscape and, consequently, monetary policy decisions.
If the number of by-elections increases, the postponement of monetary easing just before the voting day may become unavoidable. The interplay between monetary policy and political movements highlights the potential to inject uncertainty into the market. The uncertainty surrounding by-elections and parliamentary resignations intertwines with monetary policy, creating ambiguity in the schedule for normalization.
Conclusion
The interplay of the surge in stock prices and the Bank of Japan’s monetary policy has created confusion in the market. The acknowledgment of the failure of “Abenomics” by former Prime Minister Abe, the Noto Peninsula earthquake, and the uncertainty surrounding the timeline for monetary policy normalization are challenging investors. Amidst the growing uncertainties, investors are required to navigate the market cautiously. Attention will be closely focused on future developments, and prudent investment decisions are essential in an environment marked by heightened uncertainty.
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