ADVERTISEMENT

Japan Bulls See Stock Recovery on Emergency Call, Stimulus

Japan Bulls Expect Stocks to Recover on Emergency Call, Stimulus

(Bloomberg) --

Prime Minister Shinzo Abe’s plan to declare a state of emergency in parts of Japan to contain the coronavirus was surprisingly well-received in the stock market, with many participants feeling confident that local equities have bottomed.

Abe unveiled a stimulus package totaling 108 trillion yen ($990 billion) on Monday, and later on Tuesday declared a state of emergency for Tokyo, Osaka and five other prefectures. Investors anticipate the steps will accelerate domestic efforts to contain the virus spread, while the larger-than-expected stimulus will be a boost.

The benchmark Topix index capped its best two-day advance in two weeks. The blue-chip Nikkei 225 Stock Average closed above its 25-day moving average and inched away from the key resistance level of 19,000. Market sentiment was also bolstered by news of declining infection rates in Italy, France, Germany and Spain, while deaths looked to be plateauing in New York State and China reported no fatalities for the first time since the pandemic emerged.

Japan Bulls See Stock Recovery on Emergency Call, Stimulus

Nicholas Smith, a strategist at CLSA Ltd. in Tokyo, sees a “very good chance” that the Nikkei 225 will head toward testing the 20,000 mark. “The chances are that we’ve probably seen the lows and that the market will start to make its way up.”

Here’s what other observers had to say:

WisdomTree Investments, Jesper Koll

“Japan’s economic policy actions continue to impress,” Koll, a senior adviser at the ETF provider, wrote in a note. “While concerns over the virus spread and ‘emergency rule’ remain a justifiable focus of media attention, from an economist’s perspective, a solid and strong foundation for a V-shaped recovery into 2021 is being built.”

Importantly, public transportation, food supply, convenience stores and restaurants will not be affected by the emergency call because, unlike in many western democracies, a so-called “full lockdown” is not legally enforceable in Japan, Koll said.

Yet, “it is widely expected that Japanese civil obedience and social mores will result in a slowdown in activity similar to those observed elsewhere,” he said. He estimates the decrease in activity will result in an annualized drag on gross domestic product of about 20%, which he says is similar to the size of the stimulus package.

Daiwa Securities, Hideyuki Ishiguro

“A sense of relief is spreading, seeing that infection cases in Europe may have started to peak out,” said Ishiguro, a senior strategist at Daiwa Securities. With Japan’s emergency declaration, “because it’s being introduced together with stimulus and ahead of any exponential growth in infection cases, equities are likely to find stability.”

Rakuten Securities, Masayuki Kubota

“It’s become hard to make your way by selling shares,” said the Tokyo-based chief strategist for Rakuten Securities Economic Research Institute. “The Nikkei 225 rose 17% last week and those who’d been shorting equities are taking quite a beating. It’ll be a bit scary to sell against this market.”

Still, Kubota said there’s a need to watch how effective Japan’s latest measures are in containing the virus spread. “An emergency declaration won’t be legally binding here, and it’s the weakest one in kind, taken among countries that have enforced measures.”

Mitsubishi UFJ Morgan Stanley Securities, Seiji Arai

“There was too much worry beforehand -- the emergency declaration in Tokyo, an unprecedented step, was initially thought of as the worst market event you could imagine,” the senior strategist said. “Since the government has very little power, we have no idea whether this measure will actually help reduce the number of infections.”

“Regardless of what happens from here, the market’s seeing that all the bad news is now behind it, leading those who sold stocks to unwind their positions,” he said.

©2020 Bloomberg L.P.