Japanese Stocks: Nikkei Average at a Crucial Point of 34,000 Yen
2025-04-02
Amid uncertainty surrounding U.S. tariff policies, concerns over economic slowdown and persistent high prices have emerged.
Tariffs on automobiles and semiconductors strongly weighed on the Nikkei Average, while the NT ratio sharply declined.
The Nikkei Average plunged at the start of the week, and on March 31, it hit the 35,500 yen mark during trading hours, the first time since September 2024. The release of February's U.S. Personal Consumption Expenditures (PCE) data on the previous weekend showed a modest 0.1% increase in real PCE compared to the previous month (a decrease of 0.6%), signaling a slowdown in personal consumption growth. Additionally, the PCE deflator, excluding food and energy, rose 2.8% year-on-year, surpassing the market expectation of 2.7%, strengthening concerns about persistent inflation. According to the Atlanta Federal Reserve's GDPNow model, which forecasts real GDP based on economic indicators, the U.S. real GDP for the first quarter of 2024 was predicted to decline by 2.8% compared to the previous quarter as of March 28. This was seen as a technical adjustment reflecting a sharp increase in trade deficits linked to gold market arbitrage, but even excluding the impact of gold imports, negative growth of 0.5% was forecast. The PCE for demand items is also expected to remain weak (0.3% increase), exacerbating concerns about economic deterioration.
Looking at the performance from January 7, when the Nikkei Average reached its highest level of the year, to yesterday, the drop in the Nikkei Average (-11.1%) was more significant compared to the TOPIX (-4.6%), and the NT ratio (Nikkei Average/TOPIX) sharply decreased from 14.4x to 13.4x, marking the lowest level since April 2020. Moreover, the performance of the TOPIX Growth Index (-7.6%) was worse than that of the TOPIX Value Index (-1.7%), while the performance of the Nikkei Average Export 50 Index (-9.8%) was worse than that of the Domestic Demand 50 Index (+1.5%). Amid growing uncertainty due to the U.S. tariff policies, the Nikkei Average was strongly pressured by concerns over deteriorating earnings in sectors like automobiles and semiconductors due to tariffs. On the other hand, with rising expectations for additional rate hikes by the Bank of Japan, long-term interest rates in Japan have increased, supporting the performance of bank stocks and providing support for the TOPIX.
Once the full extent of U.S. tariff policies becomes clear and the impact on the economy, prices, and corporate earnings can be assessed, the downside risk for the Nikkei Average is likely to persist. Since 2015, the Nikkei Average has generally fluctuated between a lower P/E ratio range of 14-17 times (undervalued) and an upper range of 17-20 times (overvalued) on a one-year forward basis. After efforts to improve management efficiency at the Tokyo Stock Exchange gained momentum in 2023, the market has been trending in the overvalued range. However, as of yesterday, the forecast P/E ratio has dropped to 17.8 times. The lower boundary of the overvalued range, 17 times, corresponds to around 34,000 yen for the Nikkei Average, which is considered a short-term support level. If the Nikkei Average falls below this level, it will likely enter the undervalued range, and the recent low of 31,156 yen, recorded during trading hours on August 5 last year, may come into focus.
Tariffs on automobiles and semiconductors strongly weighed on the Nikkei Average, while the NT ratio sharply declined.
The Nikkei Average plunged at the start of the week, and on March 31, it hit the 35,500 yen mark during trading hours, the first time since September 2024. The release of February's U.S. Personal Consumption Expenditures (PCE) data on the previous weekend showed a modest 0.1% increase in real PCE compared to the previous month (a decrease of 0.6%), signaling a slowdown in personal consumption growth. Additionally, the PCE deflator, excluding food and energy, rose 2.8% year-on-year, surpassing the market expectation of 2.7%, strengthening concerns about persistent inflation. According to the Atlanta Federal Reserve's GDPNow model, which forecasts real GDP based on economic indicators, the U.S. real GDP for the first quarter of 2024 was predicted to decline by 2.8% compared to the previous quarter as of March 28. This was seen as a technical adjustment reflecting a sharp increase in trade deficits linked to gold market arbitrage, but even excluding the impact of gold imports, negative growth of 0.5% was forecast. The PCE for demand items is also expected to remain weak (0.3% increase), exacerbating concerns about economic deterioration.
Looking at the performance from January 7, when the Nikkei Average reached its highest level of the year, to yesterday, the drop in the Nikkei Average (-11.1%) was more significant compared to the TOPIX (-4.6%), and the NT ratio (Nikkei Average/TOPIX) sharply decreased from 14.4x to 13.4x, marking the lowest level since April 2020. Moreover, the performance of the TOPIX Growth Index (-7.6%) was worse than that of the TOPIX Value Index (-1.7%), while the performance of the Nikkei Average Export 50 Index (-9.8%) was worse than that of the Domestic Demand 50 Index (+1.5%). Amid growing uncertainty due to the U.S. tariff policies, the Nikkei Average was strongly pressured by concerns over deteriorating earnings in sectors like automobiles and semiconductors due to tariffs. On the other hand, with rising expectations for additional rate hikes by the Bank of Japan, long-term interest rates in Japan have increased, supporting the performance of bank stocks and providing support for the TOPIX.
Once the full extent of U.S. tariff policies becomes clear and the impact on the economy, prices, and corporate earnings can be assessed, the downside risk for the Nikkei Average is likely to persist. Since 2015, the Nikkei Average has generally fluctuated between a lower P/E ratio range of 14-17 times (undervalued) and an upper range of 17-20 times (overvalued) on a one-year forward basis. After efforts to improve management efficiency at the Tokyo Stock Exchange gained momentum in 2023, the market has been trending in the overvalued range. However, as of yesterday, the forecast P/E ratio has dropped to 17.8 times. The lower boundary of the overvalued range, 17 times, corresponds to around 34,000 yen for the Nikkei Average, which is considered a short-term support level. If the Nikkei Average falls below this level, it will likely enter the undervalued range, and the recent low of 31,156 yen, recorded during trading hours on August 5 last year, may come into focus.