Can Tokyo stocks survive collision with 600tn yen ceiling?

Jul 05, 2017 | News On Japan

Jul 05, 2017 (Nikkei) - Japan's blue chips managed to hold the line above 20,000 Tuesday despite North Korea's best efforts to rain on the parade. But the real test lies in whether the market value can last long beyond the 600 trillion yen ($5.29 trillion) barrier, which has proved the downfall of many a rally.

The Nikkei Stock Average opened higher Tuesday, rising to 20,197 on a softer yen. News of the latest North Korean missile launch eventually led the index to close down 23 points at 20,032, but Takashi Ito of Nomura Securities is still optimistic.

"Against the backdrop of improved global economic confidence and other factors, we have a good chance of testing the high soon," said Ito, referring to the 20,868 peak reached so far in the Abenomics era.

A weaker yen is feeding expectations for full-year profit upgrades during the upcoming April-June earnings season. The average earnings per share for Nikkei components is hovering around 1,400 yen. At the current forward price-earnings ratio of roughly 14.5, the Nikkei average will be in shooting range of 20,868 if earnings per share climb by just 50 more yen.

But the hard part comes next. The value of the Tokyo Stock Exchange's first section has only briefly topped the 600 trillion yen level before, most recently in 2015. Now the figure is approaching 605 trillion yen.

One basis for this phenomenon is the so-called Buffett indicator, named after famed American investor Warren Buffett, who once said that the ratio of a country's market cap to its gross domestic product is the best gauge of valuation. Japan's economy measures just over 500 trillion yen, suggesting that the stock market is 20% overvalued.

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