Editor’s Note
This analysis highlights two key external factors currently supporting Japanese equities: sustained US market strength and a weaker yen driven by shifting currency hedge strategies. These conditions are particularly beneficial for Japan’s export sector.
The resilience of the US stock market is a positive factor for Japanese stocks overall. Furthermore, the ongoing unwinding of de-basement trades (strategies to protect assets from currency devaluation) in anticipation of a decline in the US dollar’s value is a factor for “yen weakness/dollar strength,” which acts as a tailwind for the earnings and stock prices of Japan’s export-related companies.
At the start of the week, the Nikkei Average faced heightened risk-off sentiment due to the impact of gold/silver prices and the SOX index, leading to a decline towards the close.
On February 3rd, the Nikkei Average rebounded sharply, closing at 54,720.66 yen, up 2,065.48 yen (3.92%) from the previous day, setting a new all-time high. However, the closing price on the previous day, February 2nd (the start of the week), had fallen significantly from the prior week.
On February 2nd, the Nikkei Average opened at 53,575.37 yen. Initially, buying led by export-related stocks favored the yen’s weakness, pushing it up to 54,247.15 yen by 10:03 AM. Subsequently, however, the market gradually grew wary of factors such as the sharp decline in commodities like gold and silver on January 30th and the Philadelphia Semiconductor Index (SOX) closing down 3.87%. As a result, stock prices turned downward, ultimately closing at the day’s low of 52,655.18 yen, down 667.67 yen (1.25%) from the prior week’s close. The strengthening risk-off mood towards the close increased selling pressure on Japanese stocks overall, resulting in a drop of 1,591.97 yen from the day’s high.
A key factor in the sharp decline of gold and silver prices was former President Trump’s nomination of Kevin Warsh, considered the most hawkish among candidates, for the next Fed Chair.
Looking closely at the price movements of gold and silver that also impacted Japanese stocks: NY gold futures (front month) were bought up to around $5,600 per troy ounce on January 29th, having risen nearly 30% since the start of the year. However, they plunged the next day on the 30th, closing at $4,745.1, down $609.7 (11.4%) from the previous day.
Other precious metals also fell in tandem. For example, February silver futures fell $35 (31%) to $78, recording the largest decline rate since June 2005.
Regarding commodities like gold and silver, de-basement trades had become active, leading to an exponential rise until recently. However, on January 30th, a reaction to the preceding surge finally emerged all at once.
Mr. Warsh is viewed as the most hawkish among the final candidates for Fed Chair. Consequently, expectations for interest rate cuts receded, the dollar strengthened in the foreign exchange market, and selling accelerated in commodities like gold and silver, which had recently surged as alternative investments to the dollar.
In the Tokyo stock market on February 2nd, influenced by this trend, the top decliners were lined with precious metal-related ETFs/ETNs such as WisdomTree Silver ETF (1673), Pure Platinum ETF (1541), WisdomTree Platinum ETF (1674), NEXT NOTES Gold Futures Double Bull ETN (2036), Pure Silver Trust (1542), and WisdomTree Precious Metals Basket ETF (1676).
Furthermore, in the Japanese market on February 2nd, reflecting aversion to the SOX index’s sharp decline on January 30th, declines in AI/semiconductor-related stocks were notable. For instance, Kioxia Holdings (285A) closed down 3,000 yen (14.04%) at 18,360 yen, Lasertec (6920) down 5,080 yen (13.96%) at 31,310 yen, Advantest (6857) down 1,200 yen (4.70%) at 24,305 yen, and SoftBank Group (9984) down 163 yen (3.83%) at 4,090 yen.
However, in the US stock market on February 2nd, the three major stock indices all rebounded. The Dow Jones rose 515.19 points (1.05%) to 49,407.66, the Nasdaq Composite rose 130.29 points (0.56%) to 23,592.11, and the S&P 500 rose 37.41 points (0.54%) to 6,976.44. This was due to positive reception of the gold and silver markets narrowing their losses after the sharp drop on January 30th, and the ISM Manufacturing PMI reaching its highest level since 2022, supported by steady growth in new orders and production.
Indeed, the next day on February 3rd, the Nikkei Average rebounded sharply by 2,065.48 yen (3.92%) to close at 54,720.66 yen, updating its all-time high. A wide range of stocks were bought back, centering on high-tech stocks like semiconductors, bank stocks, and non-ferrous metal stocks.
Regarding the future direction of Japanese stocks, looking at domestic factors, the outlook is viewed as extremely favorable due to the increased likelihood that “Sanaenomics” can be vigorously promoted. This is because, according to various reports, the LDP is projected to secure 200-260 seats in single-seat constituencies alone and maintain an overwhelming advantage in the proportional representation bloc with support in the high 30% range. Combined with the Innovation Party, the ruling coalition seems to have reaching the two-thirds line of 310 seats in sight.
Of course, elections are unpredictable, and a major reversal cannot be ruled out during the remaining campaign period. However, investors should calmly assess probabilities and formulate investment strategies.
That is, I would target stocks that benefit from the “government manifesto for the general election” announced by the Liberal Democratic Party on January 21st. This is because they are highly likely to become “national policy stocks.” Specifically, stocks related to the following 17 growth investment fields could become “national policy stocks”:
– AI / Semiconductors
– Shipbuilding, Quantum
– Synthetic Biology / Bio
– Aviation / Space
– Digital / Cybersecurity
– Content
– Food Tech
– Resource / Energy Security
– GX (Green Transformation)
– Disaster Prevention / National Resilience
– Drug Discovery / Advanced Medicine
– Fusion Energy / Nuclear Fusion
– Materials (Critical Minerals / Components & Materials)
– Port Logistics
– Defense Industry
– Information & Communications
– Ocean
However, as of January 23rd, the margin buying balance (total of regulated and general margin trading on the Tokyo and Nagoya exchanges) has piled up to 5.1161 trillion yen, the highest level in the past 19 years. An increase in margin buying balances creates future selling pressure for settlement and can amplify momentum during stock price declines.
Therefore, even for “national policy stocks,” those with poor credit supply-demand (high margin buying balance and high credit ratio) coupled with deteriorating charts (stock price below the 25-day moving average and the moving average trending downward, etc.) are “untouchable.”
In any case, the Japanese economy is on a firm footing, and politically, a regime friendly to Japanese stocks is expected to continue.
I recommend active market participation, assuming buying on dips.
