It's a very happy New Year here in Japan. Not only is the turning of the calendar cause for major celebration -- the festivities are well under way here in Hakuba, in the Japanese Alps -- but investors have a lot to cheer about, too.
The Nikkei 225 closed the year at 19,114 on Friday. Since it topped the 2015 close of 19,033, it has now registered its first five-year run of higher year-end closes since 1990.
That's very significant. The year 1990 effectively marked the end of Japan's boom years of the 1980s. The surge in Japanese land values at that time resulted in the real estate under the Tokyo Imperial Palace being worth more than all the land in California.
We're nowhere near a crazy bubble like that this time around. Japan is demonstrating slow and steady growth -- you'll note 2016 ended only slightly in the black -- but growth, nonetheless. After projected 1.3% growth in the Japanese economy for fiscal 2016, which ends in March, 2017 is likely to post a gain of 1.2%.
Nikkei watchers may want to note that the index broke through its 30-year moving average for December this month. Since 2000, Nomura notes, breaking through that ceiling has led to outsize gains. For instance, the same event in December 2005 led to a 16% gain between that point and early April. When the index broke through its November 30-year average, it rose 24% between that point and June 2015.
So a rise in the order of 20.2% for the Nikkei is not out of the question -- in fact, it is suggested by those prior examples. That would bring the index to 22,215 from its starting point of 18,862 at the beginning of December.
It doesn't mean, however, that Japan's economy is on fire. The Nikkei is a price-weighted index, so it has a lot of flaws. The Topix is a much broader index, and much more representative, since it is market-cap weighted instead.
However, much like the Dow Jones Industrial Average, the Nikkei 225 is sewn into the collective investment world's memory as a significant index to track.
Where does this lead in 2017?
Nomura believes that in the second half of 2016, active funds investing in Japan rebalanced and began herding into certain outperforming stocks. That has led to high-quality equities becoming overvalued. But the herding appears to have slowed down, which then poses a significant risk of a price drop in the stocks that the herd had been selecting.
Key among those are the construction companies Daito Trust Construction (DIFTY) and Sekisui House (SKHSY) , convenience-store operator Lawson (LWSOF) , the country's largest cigarette maker -- Japan Tobacco (JAPAY) , the chemicals companies Kuraray (KURRY) , Shin-Etsu Chemical (SHECY) and Kao (KCRPY) , and the pharmaceutical companies Astellas Pharma (ALPMY) , Shinogi T:4507 and Mitsubishi Tanabe Pharma (MTZPY) .
Since all bar Shinogi have ADRs, albeit listed on the pink sheets, U.S. investors have direct access to the shares.
By contrast, there are a few stocks that are held widely by global bond funds but that have not been played by active funds or smart-beta funds. These should be stable heading into 2017, Nomura notes.
They are led by another construction company, Comsys Holdings T:1721, the retailer that runs many of Japan's 7-11 stores -- Seven & i Holdings (SVNDY) -- the chemicals company Asahi Kasei (AHKSY) , the textiles producer Wacoal Holdings (WACLY) , the pharmaceuticals companies Takeda Pharmaceutical (TKPYY) , Kaken Pharmaceutical T:4521, Eisai (ESALY) and Otsuka Holdings (OTSKY) , public-relations company Miraca Holdings T:4544, and automobile-auction company USS (USSJY) .
Again, nearly all have ADRs that are accessible to U.S. investors to trade in real time, rather than waiting for Tokyo to open.
A last word on Japan: Take a look at what the central Bank of Japan, or BOJ, is likely to do in 2017. With growth likely on a firmer footing and the administration of Prime Minister Shinzo Abe likely to introduce greater government spending and a supplementary budget, it's likely the BOJ will abandon its current stance of maintaining negative interest rates.
Japan is already clearly coming to the conclusion that pushing down interest rates is a short-lived affair with limited effect. So much is obviously made clear by the Bank of Japan's commitment to maintain the yield on the mid-term 10-year Japanese Government Bond at zero, promising an end to the current situation of negative rates.
John Authers, the senior investment commentator at the Financial Times, believes the kickback from the investment world to the BOJ's shift to negative rates was the key flashpoint for the markets in 2016.
"The reaction across global markets to the BOJ being so clear that negative rates were a step too far is probably more important than Brexit or Trump in the longer term. It might be the single most important market event of the year," Authers says in the FT's lookahead piece, "Where should I invest in 2017?"
The "policy mistake" of negative rates, as the FT has it, obviously crushed bond yields and financial stocks the world over. 2017 should see an end to the "inflation trade," and a return to the normal environment of an upward-sloping yield curve.
"Normal" interest rates, to me, clearly suggests that Japan, like the United States and perhaps Europe, will shift away from tinkering with monetary policy and will rely instead much more heavily on government spending and fiscal policy.
Greater government spending, an economy that is ticking along with very low unemployment, and consistent growth in the stock market sound like a good start to 2017 to me.
(This column has been updated to reflect that the Nikkei might see a 20.2% gain in 2017, not a 202% gain.)