The Nikkei Stock Average reaching 20,000 yen

Conditions needed to achieve 20,000 yen

The background to the Nikkei Stock Average continuing to hit new highs is the depreciation of the yen

→ There was a large net buying by foreign institutions. At the start of trading, the PER (price-earnings ratio) was inexpensive at 14.5 times

due to the improved earnings prospects from the weaker yen,

which supported the rise in stock prices. Furthermore, as stock prices rose to high levels, reaching 20,000 yen requires these two

conditions.

The PER is approaching its upper limit,

Need for an additional profit

The highs and lows of the PER for the years 2013–2016 are as follows. The boundary of the fiscal year is from June when the expected profit used to calculate PER changes to the following year March.

The division of years is from June to the following March when the forecast profit used to calculate PER shifts to the new year.

(PER highs and lows)

Highest Lowest

2013　　16.63 times　　14.02

2014　　17.55　　　13.94

2015　　16.64　　　12.97

2016　　16.64　　　12.62

(Note) 2016 is up to January 27th

Last Friday's PER was 16.60 times, close to the upper end of the four-year range.

An expansion in PER is driven by earnings growth.

The Nikkei 225 base EPS (earnings per share) was 1,172 yen as of the weekend, and

the year-on-year growth rate was 5%.

The presentation of Q3 and Q4 results will intensify, but the current consensus EPS is

1,200 yen; for the new fiscal year it is expected to be raised toward 1,300 yen,

which would push towards 20,000 yen as the essential condition for surpassing.An EPS of 1,200 yen with PER of 16.7 times would clear 20,000 yen.

Yen depreciation → return to the cycle of net buying by foreign institutions

Since the beginning of the year, weekly net positions of foreign investors in cash, futures, and total net buys/sells.

(Foreign investors' net buys/sells, in million yen)

Cash　　Futures　　Total

~01/06 +232,623 + 19,754 +252,377

~01/13 +110,574 ▲151,611 ▲ 41,038

~01/20 ▲103,955 ▲192,709 ▲ 296,664

Although foreign investors bought to a fresh high in the first week of January last year,

they have sold for two consecutive weeks recently, and cumulative for the three weeks this year is also negative.

The momentum of foreign investors who bought over 5 trillion yen in the three months of Oct–Dec weakened

because the dollar rose and the yen remained strong.

From the beginning of this year, the weekly dollar/yen rate has moved as follows with a stronger yen.

(Dollar-Yen rate, weekly average)

~01/06　　116.7 yen

~01/13　　115.2

~01/20　　114.0

~01/27　　113.8

Yen depreciation → the flow of large net buying by foreign investors has stopped. Since climbing to fresh highs last year, reaching 20,000 yen requires upward revisions to earnings, continued yen depreciation, and sustained buying by overseas investors, along with a supportive stock market. If these conditions are not met, achieving 20,000 yen will not be easy.

(Note)

I will attend a stock investment seminar hosted by Sanford (Sunward) Trading Co.

It will be held on February 9, with doors opening at 6:00 PM.

Based on the current market, I will present a market outlook for 2017.

If you are interested,

please visit Sanford Trading Co.'s website and access the seminar information site.

Seats appear to be limited, so please reply soon.

Hiroshi Kôgen