Market Overview

Japanese Stocks Surge Higher as Yen Weakens

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The Japanese stock market closed at a 6 month high on Wednesday, a day after the Bank of Japan made the unexpected announcement that it was increasing its asset purchase and lending program and had set its official inflation goal at 1 percent.

The Nikkei 225 index of Japanese stocks climbed 208.27 points higher, or 2.3 percent, to end the trading day in Japan at 9260.34. The Japanese stock market's strong performance was fueled by a weakening yen, caused by the Bank of Japan's decision to take a more active role in fighting the deflation that has been a drag on the Japanese economy for most of the last two decades. The yen has fallen against both the American dollar and the Eurozone's euro since the Bank of Japan's announcement, quickly making Japanese products more competitive in two of Japan's most important export markets.

Yesterday the Bank of Japan surprised the market when it said that it would add another 10 trillion yen, or $130 billion, to its asset purchase and lending program. By pumping additional money into the Japanese economy and letting the market know that it would finally do more to put an end to the country's chronic deflation, the Bank of Japan was able to provide Japanese exporters with some much needed relief.

Japanese exporters have long suffered the effects of a strong yen, as investors have lost confidence in Europe and the United States and moved their funds into safe haven currencies like the Swiss franc and the Japanese yen. Yesterday's announcement from the Bank of Japan sent the yen falling and Japanese stocks climbed higher today on the back of the weakening yen.

Major exporters like Honda (NYSE: HMC) and Toyota Motor Corporation (NYSE: TM) as well as financial companies like Mitsubishi UFJ Financial Group (NYSE: MTU) and Nomura Holdings (NYSE: NMR) performed particularly well on Wednesday and each of those four companies easily outperformed the broader Japanese stock market.

The rise of Japanese stocks prices was also aided by better than expected economic results coming out of the European Union. Although the the European Union as a whole experienced an economic contraction, it wasn't as bad as expected. France, the Eurozone's second biggest economy, also surprised the market when it reported that its economy grew 0.2 percent during the fourth quarter instead of a widely expected contraction of 0.2 percent.

Japanese stocks could be set to move even higher if the Japanese yen continues to fall. If Japanese authorities stick to the more aggressive approach that they have recently embraced, the Japanese economy could see significant economic growth and Japan's exporters could see their profits climb higher as well.


ACTION ITEMS:

Bullish:
Traders who believe that the yen will continue to weaken might want to consider the following trades:
  • Japanese stocks like Honda (NYSE: HMC), Sony (NYSE: SNE) and Nomura Holdings (NYSE: NMR) could have significantly more upside if a weakening yen causes Japanese companies' profits to rise. The yen could continue to weaken if the Bank of Japan sticks to a more aggressive strategy and the Eurozone doesn't hit the markets with a major shock like a Greek default.
Bearish:
Traders who believe that Greece will eventually default may consider alternative positions:
  • The CurrencyShares Japanese Yen Trust (NYSE: FXY) ETF could climb higher if a Greek default causes the direction that the yen is headed to reverse. If Greece eventually defaults, many traders will look back to this week as buying opportunity that they let slip by.
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