The Nikkei 225 Index crossing the 16,000 level mark – A significant milestone, or are Japanese equity markets approaching towards potential overvaluation territory?

Several business news wires reported on December 25, 2013 that the Nikkei 225 Index has surpassed all major technical resistance levels to close for the first time in six years. A one-year daily chart of the Nikkei 225 index is as follows:

Nikkei 225 daily line chart - Dec 26 2013

Source: stockcharts.com (click on image for better focus)

Readers might note the 50-day and 200-day moving average (MA) overlays, and there is a sense that in early November 2013, the index has crossed the 50-day MA, and staged a technical ‘breakout’ on the upside sometime on November 11. The Relative Strength Indicator (RSI) above the chart indicating a potential ‘overvaluation’ as it is consolidating around the 70-level (above the 70-day signals potential overvaluation). The MACD or the Moving Average Convergence –Divergence (MACD) shown below the chart comprises a 12-day Exponential Moving Average (EMA), 26-Day EMA, and a 9-Day EMA ( A Signal line meant to identify turns). The MACD Histogram represents the difference between MACD and its 9-day EMA. According to excerpts obtained from stockcharts.com, the histogram is positive when the MACD Line (the black-coloured line) is above the Signal line (red line), and negative when the MACD Line is below its Signal line.

Although not a technical chartist by profession, the basic conclusion I might be able to offer is that although the Nikkei 225 index has broken its technical resistance levels, but the duration of the rise since last month does provide some caution as to whether such strong rallies to the upside could continue. Based on the technical chart aspect of evaluating the potential valuation of the Nikkei 225 index, it indicates some signs of an overvalued market in Japan, as most of technical resistance levels have been breached, including the 50-day MA, and RSI hovering around the potential overvaluation mark of 70. In addition, based on data obtained from Thomson Reuters, the Japanese market is currently trading at an average of 20.83 times price-earnings (P/E) multiple, which is quite high when comparing to the 13.00 to 17.00 average P/E multiple for the US markets. The Japanese Yen has also weakened quite substantially to trade at around the 104.00 levels to the US Dollar since Monday, December 23, 2013. If there is a potential short-term correction of the index, my expectation will be that the next technical support level is around the 15,250 levels.

At the time of this writing, the Nikkei 225 is trading at an average levels of 16,148 as of early Asian morning trading hours, and the Japanese Yen (JPY) is at the average bid/ask spot quote of 104.74 – 104.78. The index has been ‘straight up’ since the beginning of 2013 when Prime Minister Shinzo Abe was elected as the new prime minister, and together with Governor Haruhiko Kuroda at the country’s central bank, the Bank of Japan (BOJ), the pair has unleashed a tremendous amount of economic stimulus measures aimed to increase output, end the decades old deflationary cycle, inject confidence among business executives and the Japanese people that the country is showing some signs of a true turnaround this type. However, there are criticisms coming from foreign business executives and other world leaders saying that Japan chose to compete unfairly in global trade affairs with a severely undervalued currency.

Criticisms aside, looking on to 2014, it remains to be seen whether there will be a real recovery in the Japanese economy. Although Governor Kuroda of the BOJ offered some comments regarding some positive views about expected inflation levels next year during a business lobby group meeting on December 25, 2013, it is still quite early to tell whether economic growth could surpass expectations especially when the consumption tax hike to 8.00 percent is set to kick in by April 2014.

2014 looks set to be an interesting year for many Japanese economy watchers like myself and others.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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