As a result of its long, drawn-out decline, the Nikkei is now a favourite target of some value hunters. After all, the entire Japanese market now offers a dividend yield of 2.5 per cent. OK, that may not sound particularly generous, but it's more than five times what Japanese equities were yielding in the late 1980s. It's also comparable to the level seen in the mid-1970s, just as they were embarking on a fantastic boom.
For my part, I think Japanese stocks offer reasonable value these days, rather than screaming, once-in-a-lifetime value. But I am not necessarily convinced that their long-term bear market is necessarily over yet. From its current level of 8600 or so, it wouldn’t take all that much for the Nikkei to revisit its late 2008 trough just below 7000. In this environment, therefore, my main interest in this market would be short-term trading.
I should confess that I do not often trade the Nikkei. That's mainly to do with timing. Tokyo's trading day gets under way at midnight London time, an hour at which I’m generally tucked up in bed. However, so long as you trade with a stop-loss and you don't mind not witnessing the action first hand, there is no reason to avoid this market altogether.
A key line I use to determine my trading stance on the Nikkei is its 55-day exponential moving average. Quite simply, my bias would be towards long positions when the index is above this line, and short below it. A simple strategy of buying the index every time it crossed above this line and reversing into a short position every time it dipped below it would have produced a gain of 28556 points since early 1990, compared with a buy-and-hold loss of 23198.
While effective, this straightforward strategy has its pitfalls. The main one is that it has produced many more losing trades than winners over the past two decades and a bit - 268 versus 107. It still made money, though, because the average gain was much higher than the average loss - 828 points versus 224 points. At one stage, it notched up 14 consecutive losers. That's psychologically difficult to handle. I am therefore trying to build a more sophisticated strategy that reduces the frequency of losers while hanging on to as much of that profit as possible.
In order for Japan's stock market to break decisively higher, I believe the Bank of Japan needs to weaken the Yen significantly. The Nikkei tends to move in the same direction as the US Dollar/Yen exchange rate. So, when the dollar strengthens versus the Yen, the index typically rallies. To weaken the Yen, the BoJ needs to print money more aggressively. Although it was the pioneer of what we now call quantitative easing more than a decade ago, it has been much more timid in its approach than the US or UK central banks. This needs to change.
