Diary of a Financier

Japan still waiting to take fork in the road

In Capital Markets on Fri 4 Oct 2013 at 12:03

More than a month has passed since my last entry on Japanese macro developments.  At that time, I was awaiting confirmation of a breakout in $USDJPY before adding to our $DXJ position.  Amazingly, Japan still sits at this fork in the road, having taken months now to decide which way it’ll turn.

The bias remains strongly in favor of the bull camp, and that’s obviously where my chips lie.  That said, the timing of this diary entry is no coincidence: USDJPY @ 97.04 sits at trendline support (>97) of its classic bull pennant.  Were the pair to breakdown beneath this level (<97), not only would the pattern fail, but I can see a permutation of the chart that would deteriorate quickly into a secularly bearish setup.

The charts’ indecision is appropriate, if you consider the storyline.  Unsurprisingly, the Yen has reached this precarious trap door right after Prime Minister Shizo Abe’s anxiously-anticipated announcement that he’d hike sales tax rates for the first time since 1997.  Abenomics’ introduction originally hoisted the economy up this flagpole, and now Japan awaits its “third arrow” to propel her higher.

Nevertheless, my base case remains in favor of a breakout, because the technicals–in aggregate–are probabalistically skewed in that direction, with that bull pennant part of a larger Cup & Handle:

USDJPY daily/weekly/monthly

USDJPY daily/weekly/monthly

Again, I still expect a bounce off this trendline to predicate a rally over flagpole resistance (103.7), then test long term trendline resistance (~105) of JPY’s bear channel.

The significance of FX to the Japanese stock market is undeniable, as manifest by the high correlation between the two asset classes.  The NIKKEI 225 ($NKY) shows the same setup as the Yen and should therefore piggyback on the coming reaction:

NKY daily/weekly/monthly

NKY daily/weekly/monthly

–Romeo

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