The 'new dawn' in Japan will last even as the yen rises

published 31 October 2005

"All good things come to an end," says Moneyweek Roundtable member Jonathan Allum in The Blah. And thus the run of upbeat Japanese macro data has expired with this week's Industrial Production report. After a 3.1% rise in January, a decline had been expected in February, but it came in rather higher than thought at 3.7%. That said, this number should not be taken as a sign that the "new dawn" in Japan is not for real: not only may the January and February figures be "distorted by inadequacies in the seasonal adjustment calculations", but most think the fall is a "blip" anyway. Output is expected to rebound 0.5% for March. It is also worth noting that the "mood of the small Japanese businessman" is much improved of late.

But what of the rising yen? asks CBS MarketWatch.com. Amid rumours that the Japanese have ended their "massive intervention policy" (aimed at keeping the yen cheap and hence competitive against the dollar), the yen has just hit a six-week high of 105.2 to the dollar, within a whisker of its three-year high of 105.16. Surely this puts the country's exporters, and hence its nascent recovery, at risk? Not according to the Bank of Japan, says The Times. Officials there say "we have reached the point where we are confident that the Japanese recovery no longer depends on export strength. The interventions have served their purpose". It seems that the recovery is "true" enough for the yen to be allowed to rise.

There are also technical reasons to think that Japan's bull market can keep moving - rising yen or no, says Bill Meridan in his Cycles Research Early Warning Service. The market appears to have made "an important breakout that points to higher prices". The second chart below shows that on a weekly basis the index now resembles an "inverse head and shoulders pattern"; it has broken out above its resistance line at 11,050 (this is now to be considered a support line) and targets of around 13,000-14,000 now make sense, particularly as traditionally April has been the strongest month for the Nikkei relative to global markets.