Japan's Nikkei is set to end slightly lower this year but rise in 2017 as expectations US President-elect Donald Trump's policies will ratchet up interest rates buoyed the dollar against the yen, giving Japan Inc's earnings a boost, a Reuters poll found. The Nikkei share average is expected to trade at 18,600 at the end of 2016, according to the median forecast of 21 analysts polled by Reuters in the past week, up 1.3 percent from Tuesday's close of 18,360.54. It compares with the closing price of 2015 at 19,033.71.
The Nikkei is seen trading at 19,000 in mid-2017 and 20,000 at end-2017. Market participants said the anticipated US interest rate hikes in 2017 on the back of a recovering US economy will also likely be positive for Japanese equities. But the sharp rises in equities, dollar-yen levels and US yields in relatively quick time, profit-taking could slow the momentum some time next year. "Despite hopes that the US economy is strong, US rate increases will likely be limited up to twice next year, and after US yields and the dollar-yen rose in a short-period of time, they are expected to correct," said Akio Yoshino, chief economist at equity research and strategy department at Amundi Japan, who sees the Nikkei at 18,500 by mid-2017 and 19,200 at end-2017.
"The market will likely cool down around next spring, as not all the policies that Trump had presented are expected to realize smoothly." Forecasts for the end of 2016 went from 17,500 to 19,500. They were 13,000 to 21,500 for next June, and 9,000-25,000 for the end of next year. Japanese equity markets have surged in the past four years since Prime Minister Shinzo Abe took office, with the Nikkei hitting an almost two-decade high in June 2015, on hopes his Abenomics policies of monetary stimulus, fiscal expansion and structural reforms would end decades of low inflation and weak growth.
But the attention has shifted to politics and growth in the United States, after Trump's surprise election win last month, underpinned by expectations his administration would boost economic growth through increased infrastructure spending, corporate tax cuts and reduced regulation.
Investors would continue buying into Japanese exporters as a cheaper yen makes them more competitive abroad and lifts their profits when repatriated, analysts said. But downside risks include Trump's protectionist trade stance, anti-globalization moves in Europe and uncertainty over the Bank Of Japan's monetary policy, they added. The BoJ made an abrupt shift in September to targeting interest rates on government bonds to achieve its elusive inflation target, after years of massive money printing failed to jolt the economy out of decades-long stagnation.
It adopted "yield curve control" under which it will buy long-term government bonds to keep 10-year bond yields at current levels around zero percent. However, Japanese government bond yields jumped in sympathy with rising US Treasury yields after Trump's upset month, while policymakers try to keep borrowing costs low to spur stubbornly low inflation.
The risk is that the BoJ might have to push up the 10-year Japanese government bond yield target. "The BoJ might shift up the targeted rate on the 10 year government bonds too rapidly through 2017 and taper ETF purchases," said John Vail, chief global strategist at Nikko Asset Management.
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