Weak Yen Validates $150 Ceiling for Nikkei 225: Chart

(Bloomberg) — Overseas investors in Japanese equities beware: the yen’s losses are likely to outpace the Nikkei 225 Stock Average’s gains in dollar terms as monetary policy diverges in Japan and the U.S.

The CHART OF THE DAY shows that the Nikkei 225 measured in dollars closed at $ 158.76 on Monday, little changed from the highest since August 2000 reached on March 13, as Japan’s currency traded within one yen of a seven-year low versus the dollar. The lower panel shows large speculators renewed bets this month the currency will weaken, after previously trimming wagers against the yen to the least since November 2012.

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The equity gauge’s elevated level is unsustainable and will decline towards $ 150, based on technical indicators, a ceiling that’s largely held since 2000, says Daisuke Karakama, chief market economist at Mizuho Bank Ltd. So, even if the stock benchmark rallies further in yen terms, the dollar-based Nikkei won’t go much higher, he said.

“The Nikkei’s rally looks overheated from the point of view of foreign investors, given the likelihood of yen weakness,” he said. Domestic stock investors, especially pension funds, helped fuel the index’s yen-based rally, he said.

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The Federal Reserve concludes a two-day policy meeting Wednesday in Washington, with traders focusing on signals about the timing of the U.S. central bank’s first interest-rate increase since 2006. The Bank of Japan expanded its monetary easing in October, and 23 of 34 economists in a Bloomberg News survey forecast the BOJ will increase stimulus by Oct. 31.

“As the Fed is likely to remove ‘patience’ from its statement at this week’s meeting and move closer to a lift-off, the yen may weaken further to 124-to-125 per dollar in the next couple of months,” Karakama said. That presages a “healthy correction” for dollar-based stock investors, and the $ 150 level has been a consistent measure of risk tolerance for foreigners, he said.

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The Nikkei has closed above $ 150 since Feb. 12, a streak of 23 days. After falling below that level in 2000, the longest it had sustained gains above $ 150 was 15 days in July and August last year.

To contact the reporters on this story: Chikako Mogi in Tokyo at cmogi@bloomberg.net; Hiroko Komiya in Tokyo at hkomiya1@bloomberg.net

To contact the editors responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net Lee Miller, Jonathan Annells

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