Market Updates Nikkei 225 Index Marches Above 20,000 Points

• The Nikkei 225 Index breached the 20,000 point barrier for the first time in 18 months as a weaker yen and positive Japanese economic data fuelled bullish market sentiment.

• Japan’s aging population remains a major demographic challenge to the success of Abenomics; the nation’s working-age population dropped to a record low of 61% in 2015.

• The focus for the next Bank of Japan policy meeting on 19 July and 20 July will be on whether the central bank will adjust its monetary programme or advise on the timetable of an eventual exit from stimulus.

• SGX Mini Nikkei Futures (US$18,000 notional) offers the tightest spreads globally of 1.5 index points. Effective from 1 July 2017, position transfer fees for the SGX Mini Nikkei Futures (NS) and the SGX Nikkei Futures (NK) will be waived; the contracts are fungible at a ratio of 5:1 (NS:NK).

Nikkei Index Marches to Record High

At the start of June, the Nikkei 225 Index breached 20,000 points for the first time in 18 months. A weaker yen and positive Japanese economic data fueled the equities rally and prompted the return of foreign investors. In the 12 months to 27 June 2017, the Nikkei 225 Index gained 24% whilst the yen depreciated 8%.

In the 2016 fiscal year, corporate profits climbed to record levels with net income at Japanese companies rising 16% year-on-year, while 77% of firms beat forecasts, according to CLSA Ltd. In addition, Japan’s unemployment rate held at a two-decade low whilst capital spending in the first quarter of 2017 topped estimates.

Chart 1: Performance of Nikkei 225 Index and Japanese yen

Source: Bloomberg

The optimistic economic data gained the attention of foreign investors who purchased US$13 billion in Japanese stocks from April to May, after being net sellers in the first quarter of the year. European investors were the biggest converts to the Japanese equities narrative, accounting for 97% of the net inflow.

Chart 2: Foreign Investor Inflow (Outflow) into Japanese Equities (Net US$ Billions)

Source: Japan Exchange Group

Will Abenomics Triumph Over Japan’s Demographic Challenges?

Japan’s aging population remains a major long-term risk to the success of Abenomics – the mix of ultra-easy monetary policy, fiscal spending and reforms that was the brainchild of Prime Minister Shinzo Abe following his re-election in 2012.

Since 1992, the country's working-age population has dropped from a peak of 70% of the total population to a record low of 61% in 2015. Japan’s demographic challenges have undermined efforts to engineer a sustained economic recovery, as a greying populace is naturally more inclined to save rather than spend.

In a Reuters Corporate Survey in June 2017, Japanese firms noted that their biggest concerns over the next three years include reduced domestic consumption and labour shortages, highlighting the impediment a shrinking and rapidly aging population pose to economic growth.

Chart 3: Japan’s Working Population (% of Total Population)[1]

Source: World Bank
Note 1: Working age is defined as ages 15 to 64

Upcoming Bank of Japan Policy Meeting

In its June policy meeting, the Bank of Japan (BOJ) maintained its monetary policy and raised its forecast for real GDP growth for the 2017-2018 fiscal year from 1.5% to 1.6%. The central bank’s reflationary measures were left unchanged, with negative 0.1% interest rate, yield-curve control and asset purchases targeted at 80 trillion yen.

The International Monetary Fund (IMF) has weighed in amidst widespread speculation on the timetable of Japan’s quantitative easing exit. “The BOJ should carefully calibrate its yield curve policy, if downside risks materialise, to provide additional monetary easing,” the IMF said in its annual Article 4 evaluation of the Japanese economy. The BOJ maintained this stance at its June policy meeting to continue to buy government bonds such that its holdings increase at an aggressive annual pace of 80 trillion yen.

The next two-day BOJ policy meeting takes place on 19 July and 20 July. The focus will continue to be on whether the central bank will adjust its monetary programme or advise on the timetable of the eventual exit from stimulus.

Chart 4: Bank of Japan Overnight Call Rate

Source: Bloomberg, Bank of Japan

Narrowest Listed Nikkei Futures Spreads

SGX offers the world’s widest suite of offshore Japan products, including the flagship Nikkei 225 Index Futures contract. As the dominant offshore Nikkei derivatives venue, SGX offers the tightest spreads through the trading session for both the full-sized Nikkei Futures (US$89,000 notional) and mini-sized Nikkei Futures (US$18,000 notional).

Globally, the narrowest listed Nikkei Futures bid-offer spreads are available via the SGX Mini Nikkei Futures (NS), which trades at 3 index points wide or 1.5 basis points. This compares favourably to the minimum tick size of 5 index points at the CME and Japan Exchange’s Nikkei Futures contracts.

Effective from 1 July 2017, the position transfer fees for the SGX Mini Nikkei Futures (NS) and the SGX Nikkei Futures (NK) will be waived; the contracts are fungible at a ratio of 5:1 (NS:NK).

Chart 4: SGX Nikkei 225 Index Futures Best Bid/Ask Spreads (Basis Points)

Source: SGX, 19 June 2017 to 29 June 2017

Table 1: Contract Specification of SGX Nikkei 225 Index Futures

 

SGX’s Japan-related equity derivatives are available for trading on all Japanese holidays, with the exception of New Year’s Day (1 January). In addition, margin discounts on spreads formed with other SGX derivatives allow for greater capital efficiency for investors who have views on multiple Asian markets.

Table 2: Cross-Product Margin Offsets

Source: SGX, 3 July 2017

For more information, please visit www.sgx.com/derivatives/nikkei225.