Nikkei’s Rally Not Driven by Fundamentals

A huge shift towards Japan stocks by the public pension fund, coupled with measures from the BOJ has further underpinned the rally, but those gains have raised concerns among some analysts.

In October, the BOJ said it would triple annual purchases of Exchange Trade Funds and Japanese real-estate investment trusts. In January alone, it spent 344 billion yen ($2.89 billion) on ETFs, according to central bank data.

Meanwhile, Japan’s Government Pension Investment Fund (GPIF) doubled its domestic stock allocation to 25 percent; many private sector pension funds are benchmarked to the GPIF.

The combined flood of liquidity, from “overseas investors and the artificial floor set by the GPIF and the BOJ, which buy on any dip” have helped Tokyo stock markets perform well, said Mizuho Securities’ chief market economist Yasunari Ueno.

However, that has raised concerns the Nikkei is in bubble territory.

“The fundamentals don’t support the prices anymore,” said Mizuho’s Ueno. “Stock and bond prices cannot rise together for long if the market are behaving normally and pricing in fundamentals,” he said. In a “normal” market, positive economic data would prompt investors to buy stocks and sell bonds, he pointed out.

But of late, investors have been buying stocks and government bonds: the yield on the 10-year Japanese government bonds have fallen by 8.29 percent over the past five days, to 0.375 percent. Bond yields move in inverse to the price.

via CNBC

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