OREANDA-NEWS. A falling Nikkei, the rising yen and vice versa, have been the cornerstone of investors' trading strategy on Japan for some time.

However, a recent surge in Japanese stocks was not followed by an immediate move in the currency. Instead, since 16 February, while the Nikkei 225 Index started gaining, the yen took 2 weeks to weaken.

JPY and Nikkei 225 Index Performance

 

Two reasons were suggested for this lag:

1.       The influx of public money into domestic equities appears to be ending after Japan's Government Pension Investment Fund (GPIF) raised its stocks allocation to 25% from 8% in a surprise announcement in October. According to analysts, a one percentage point shift by the GPIF into stocks is worth some 1 trillion yen (US\$8.35 billion), and this has driven the Nikkei's recent rally. With other semi-public pension funds also gearing up to benchmark their allocation ratios to GPIF's, Japanese equities could see further upside going forward, regardless of dollar-yen movements.

2.       The yen has retreated substantially against the US dollar in 2014. Japan’s central bank has already exhausted most of its monetary ammunition, while other central banks, which have just started on their respective easing, have more room to manoeuvre. The dollar’s strength is borne out of the weakness of other currencies.

The inversion of Japanese equity gains to yen depreciation has been a constant theme since Abenomics began two years ago and the Bank of Japan started its unprecedented money printing experiment. This spurred a more than 70% surge in its equity market as Japanese exporters were seen benefiting from a declining currency.

This trend has recently stalled. Since the start of the year, the yen has depreciated 1.39%, while the Nikkei has risen 10%. For Japan equities, a 10 yen depreciation represents 5% growth in the Nikkei basket.

On the other hand, another trend is emerging. As crude oil (WTI Crude Oil Futures) retreated on 16 February, the Nikkei 225 Index began to surge. It is unclear if this trend will continue.

Nikkei 225 Index and WTI Crude Oil Futures Performance

Source: Bloomberg

SGX Nikkei Index Futures and USD/JPY Futures

The break of the inverse relationship between Nikkei 225 and JPY could provide excellent opportunities for arbitrage, if the trend resumes later.

Investors could make use of the SGX Nikkei 225 Index futures contract, which trades from 7.45am to 2.30pm Singapore time during the T session and 3.15pm to 2.00am Singapore time during the extended hour session.

The SGX USD/JPY FX futures contracts could also be used as part of the conjunction. The SGX USD/JPY futures will be offered in 2 different contract sizes, namely a Standard contract with contract value of US\$100,000 and a Titan contract with a contract value of US\$500,000. These contracts will trade from 7.40am to 6.00pm Singapore time during the T session and 6.45pm to 2.00am Singapore time during the extended hour session.