Japan's Stock Market Shines with Boost from US Chipmaker

Asia’s stock markets showed cautious optimism on Friday, with Japan leading the gains, while the dollar took a breather as investors hoped for a last-minute deal to avoid a U.S. debt default. MSCI’s broadest index of Asia-Pacific shares outside Japan drifted 0.6% higher, despite thin trade due to a holiday in Hong Kong. However, the index remained down 1.3% for the week.

In contrast, Japan’s Nikkei remained in the slipstream of the positive momentum, rising 0.6%. The boost came from revenue and production upgrades for U.S. chipmaker Nvidia, which positively impacted Japanese firms with exposure to the industry. The Nikkei is now up 0.5% for the week and is on track for a seventh consecutive weekly gain, marking its longest streak in five years. This impressive performance has added approximately $460 billion to Japanese stocks.

Additionally, May data revealed that inflation in Tokyo, a reliable proxy for the nation, has slowed to 3.3%. This rate has comfortably remained above the Bank of Japan’s 2% target for an entire year. Japan, the world’s third-largest economy, has historically struggled to achieve significant and sustained increases in prices, profits, and wages. Analysts at Nomura attribute this unprecedented string of inflation drivers to the pandemic, which has prompted households to spend and led to upgraded stock forecast ranges. Consequently, Japanese companies have witnessed a tectonic shift in their price-setting behavior, resulting in improved profit margins.

Another factor contributing to Japan’s stock market success is the weak yen, which has aided Japanese exporters. Although the yen has slightly strengthened against the dollar, reaching around 140 per dollar, it has experienced a 1.3% decline this week due to concerns about a potential U.S. debt default. Meanwhile, the U.S. dollar has shown overall strength against the euro, up approximately 0.6% for the week.

U.S. Debt Ceiling Looms as Time Runs Short

The focus remains on U.S. President Joe Biden and top congressional Republican Kevin McCarthy, who are reportedly close to finalizing a deal to raise the United States government’s debt ceiling for the next two years. However, time is running short as the U.S. Treasury estimates that it will run out of funds within a week. The process of legislating any deal will likely go down to the wire and may not immediately alleviate market jitters.

The potential resolution of the debt ceiling issue comes with its own set of challenges. Authorizing the U.S. Treasury to issue bonds and bills will draw out a significant amount of liquidity from banks, cautions Damien Boey, chief equity strategist at Sydney-based investment bank Barrenjoey. Treasury bill prices, maturing on the X-date of June 1, have recovered slightly with hopes for a breakthrough. However, the rest of the yield curve remains under pressure as concerns about higher U.S. rates persist. Two-year yields have reached a 2-1/2 month high of 4.552% in Asia on Friday, marking a 24 basis points increase for the week.

Given the uncertainty surrounding U.S. debt issues, investors have also shown nervousness in the currency market. The New Zealand dollar has experienced a significant decline of 3% this week, testing 60 cents. This drop results from a combination of apprehension about higher U.S. rates and the Reserve Bank of New Zealand signaling a halt to rate hikes at its recent meeting. The Chinese yuan has also suffered, sliding alongside Chinese stocks as expectations of a strong post-pandemic recovery fade. The yuan has now experienced three weeks of decline, losing approximately 0.8% this week alone, reaching levels last seen during the COVID lockdowns in late 2022.