Japan’s Nikkei 225 near record high as Q4 recession dents BOJ pivot bets

Investing.com-- Japan’s Nikkei 225 index traded just below record highs on Thursday even as data showed the economy entered a technical recession in the fourth quarter- a trend that is expected to delay the Bank of Japan’s plans to tighten policy.

The Nikkei 225 index rose 0.9% to 38,040 points- its highest level since 1990. The index was now within spitting distance of a record-high 38,915 points last hit in 1989, before the unwinding of a massive speculative bubble in the 1990’s. 

Gains in the Nikkei were driven chiefly by heavyweight technology stocks, which tracked a rebound in their U.S. peers amid persistent optimism over an artificial intelligence boom in the coming years. 

Chipmakers and chip-adjacent stocks clocked strong gains. Tech investor SoftBank Group Corp. (TYO:9984) rose 2.4%, tracking a recovery in its British chip designing unit Arm Holdings (NASDAQ:ARM), whose shares jumped over 5% on Wednesday. Arm had doubled in value over the past week, netting SoftBank a massive $100 billion windfall after it forecast bumper earnings on an AI-driven boom.

Chip testing equipment maker Advantest Corp. (TYO:6857) rose 1.6%, while Tokyo Electron Ltd. (TYO:8035)- Japan’s most valuable chipmaker- added nearly 4%. 

Recession muddles BOJ’s plans to tighten policy

Beyond the tech sector, broader Japanese shares rose even as data showed Japan’s economy unexpectedly fell into a technical recession in the fourth quarter of 2023, as domestic spending remained sluggish amid high inflation and a weak yen. 

Gross domestic product shrank 0.1% in the December quarter, extending declines from a 0.8% drop in the prior quarter. Two consecutive quarters of GDP declines signal a technical recession.

But weakness in the economy is now expected to potentially delay or limit the Bank of Japan’s plans to begin tightening monetary policy this year.

The BOJ has signaled that it will begin hiking interest rates from ultra-low levels later in 2024, albeit at a slow pace.

Thursday’s data saw analysts forecasting that the bank will raise rates even later than initially expected, and that it had limited room to tighten monetary policy if weakness in the Japanese economy persisted. 

“Weak domestic demand dragged down overall growth… The market’s expectations for a March/April rate hike will likely die down. We maintain our BoJ call for a June rate hike but with the growing possibility of delaying this to 3Q24,” analysts at ING wrote in a note. 

Ultra-loose monetary policy was a key driver of Japan’s stellar stock rally over the past two years, especially as other major central banks raised interest rates aggressively to combat high inflation.

While the BOJ’s pivot plans this year are expected to eventually bring this trend to an end, monetary policy in the country is still expected to remain relatively loose when compared to its developed-world peers. 

A weak yen also aided Japanese exporters, with local companies logging a strong fourth-quarter earnings season.