(Bloomberg) – The recent surge in Japanese stocks has brought several market indicators closer to pre-crash levels, following US trade agreements that have boosted equity prices to new highs.
Many of these insights come from Bloomberg.
“As the market rapidly climbs, we need to stay cautious, especially considering what happened last August,” stated Arasashi, a stock manager and head of arts at Abrdn Japan Ltd.
Last August, Japanese stocks plummeted due to an unexpected interest rate hike by the Bank of Japan. Although central banks have since managed to increase policy rates without frequent setbacks, the broader economic environment has shifted, with US tariff policies significantly impacting the market.
However, some technical indicators suggest that Japanese stocks might still be at risk, particularly since the Topix index was at an all-time high just before last year’s sell-off.
The Topix’s 14-day relative strength index hit around 79 on Thursday, surpassing the level that indicates potential over-purchasing. This was similar to conditions last July, just a month before the drop occurred.
Additionally, according to Rakuten Securities Inc., the Topix Index was over 5% above its 25-day moving average on Thursday. Such divergences have previously occurred in September 2021 and March 2022.
Interestingly, the recent rally of the Topix Index isn’t accompanied by rising turnover, unlike the trends seen last July. This lack of conviction in the market is noteworthy.
As we approach the “summer lull” in August, the market might experience some turbulence after such a rapid gain, according to Rieko Otsuka, a strategist at MCP Asset Management Japan.
As Japan nears its peak revenue season, some companies may be cautious in evaluating tariff impacts. Otsuka pointed out that stock valuations should align with revenue. Currently, the forward price-to-return ratio of the Topix Index is 15.7 times higher than last July’s 15.87, which is nearly equivalent to levels just before the decline last August, yet it’s still more affordable compared to the US market.
