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Japanese stock markets wary of U.S. interest rate hikes in 2016

Japanese conductor Yutaka Sado, right, prepares to ring the bell at the Tokyo Stock Exchange during the last trading session of the year on Dec. 30, 2015. (Mainichi)

The pace at which the U.S. Federal Reserve Board increases interest rates appears likely to be a factor in determining the position of stock markets in Japan in 2016.

    The Federal Reserve on Dec. 17 implemented a hike in its key interest rate, putting an end to its zero interest-rate policy. This did not cause any major trouble in Japanese markets. But a large amount of dollar funds has flowed to emerging countries under the zero-interest rate policy. If interest rates rise, dollar funds will flow back from emerging countries to the United States, which could negatively affect business conditions in those countries. When the economies of emerging counties suffer a downturn, the Nikkei Stock Average is also negatively affected.

    Federal Reserve Chair Janet Yellen has indicted there will be no rush to raise interest rates, but if the U.S. economy overheats and the pace of interest-rate hikes increases, then it could deal a blow to the economies of emerging countries.

    China's movements are also under the spotlight. The Chinese government aims to pass from a period of high growth relying on investment to stable growth driven by consumption, but the transition is expected to take time and the predominant view is that a slowdown for some time will be unavoidable.

    Separately, with regard to declining oil prices, market observers are more conscious of the slumping performance of the economies of oil-producing countries and energy-related businesses than of an easing of the financial burden on households and companies. According to Hiromichi Shirakawa, chief economist at Credit Suisse, the risk of a downturn in the world economy is increasing.

    The outcome of "Abenomics" economic policy mix promoted by Prime Minister Shinzo Abe is also likely to prove key in 2016. Business revenue spurred by devaluation of the yen is at an all-time high, but the increase in food prices and the cost of some other items due to the weak yen have put pressure on household finances. Because of this, personal spending, which accounts for 60 percent of the nation's gross domestic product, has been slow to recover. Just how far companies can go in converting profits into wage increases will be a focus of spring wage negotiations this year.

    At the same time, Japan faces a House of Councillors election in July 2016.

    "The government is paying attention to economic conditions in the supplementary budget," commented Norihiro Fujito, a senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities. There are views that an expansionary fiscal policy will serve as material for stock price increases. Attention is also focused on whether the Bank of Japan will initiate additional monetary easing.

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