Nikkei 30,000?

The other day I made the point here that the Japanese were not likely to raise rates much by much more than a quarter-percent any time soon, since they were long-overdue a bull-run which has just got started, and were probably more concerned about stopping that run in its tracks than letting it oversell itself.

Justin Urquhart-Stewart, Director of Seven Investment Management and writing at the London Stock Exchange, makes a noteworthy observation about the potential rate hike in the Japanese economy:

What I find far more interesting is the expected impact of what such a small rise might have domestically in Japan. In the UK if rates rise we quite rightly fret about the impact on peoples’ borrowing and the increase in mortgage payments, as well as the effect on the vital level of consumer spending.

Not so in Japan. It has been estimated that a 0.25% rate hike could increase household income by 1.1 Trillion Yen (around £233 billion!) which is an approximate increase of 0.4% in household income. This in turn could further support consumer expenditure and consequently provide a timely fillip for the vital but struggling retail side of the economy. How quirky does this seem when compared to our heavily indebted consumer society? In Japan the growing army of actual and would-be pensioners have been saving their hard earned cash and, since the start of the depression in the early nineties, have veered away from the financial maelstroms of the Japanese property and stock markets. So an extra “bip” on the deposit rate can have a marked impact.

From an American or European standpoint, it's strange to imagine a world in which interest rate hikes mean good news for everyone, but when the majority of people are debt-free with cash in the bank, it pays off.

Most notably however, the observation re-enforces my previous point about buying Japanese equity at this level. This is because a rate-hike will make everyone in Japan feel little bit richer, as well as a little more secure about domestic growth prospects, and when we all feel that way, we tend to spend more and take more risks; in investment terms, the latter means we move from cash to equity positions.

Added to the prospect that the Japanese will keep the new 0.5% rate flat for quite some time, and you have a pretty perfect 2-year equity bull-run in place. With the Nikkei 225 at 18,188.42, it's catching up fast with the crucial 20,000 mark - having grown by 22.8% in the last year - but still a long way off from the time in the early 1990's when it topped 40,000, which is exactly where you want a market to be when you're buying aggressively: right in the middle with a competitive but not irresponsible upward growth curve.

In fact, I would say that the Nikkei 225 could well reach 30,000 within the next 12 months. Sound ridiculous? Think how ridiculous the phrase Dow 13,000 sounded only six months ago. In the right economic environment, markets often take off far quicker than anyone expects.

Comments

[gab]

Excellent point. Why stop at 1/2% ? If every 1/4% point adds 233 billion pounds (sorry I don't have the little L sign for pounds on my keyboard) then perhaps the Japaneses central bank should just keep raising rates until every body feels more wealthy.