Japanese Stocks will Need a Boost from the Economy to Break Through

The Japanese market represents the world’s third biggest economy. It’s also the biggest country weighting in the EAFE iShares (19%). So it’s direction has a lot of influence on EAFE direction. Although Japan has been one of the world’s worst performers over the last two decades, it was the world’s strongest market during 2013. The benchmark equity index surged during the prior year but has had trouble moving forward in 2014.

The weekly bars of the WisdomTree Japan Hedged Equity ETF (NYSEARCA:DXJ). Which removes the influence of the yen on the stock market started rising near the end of 2012, and surged throughout the first half 2013 following a large quantitative easing program installed by the new government. Since May 2013, the DXJ has been trending sideways in an apparent symmetrical triangle. It has also remained above support along its 2010 highs. Japan has been a drag on the EFA during that period.

A resumption of Japan’s uptrend would give a big boost to developed markets. The monthly bars show the 2013 rally in the Nikkei Index stalling at a resistance line along its 1996, 2000, and 2007 highs. Add Japan to the list of foreign stocks that are testing major overhead resistance.

Unfortunately, Japanese stocks will need a boost from the economy, which it has not receive in 2014. Thursday retail sales did little to help. Retail sales fell 13.7% on the month, after having increased 6.4% in March. The year over year rate fell to -4.4% from 11.0%. Japan’s GDP expanded by 5.9% at an annualized rate in Q1 and is expected to contract by 3.0-3.5% this quarter.