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Analysts bullish to very bullish on Japanese stocks

Garry Evans has been a busy man lately, jetting off to meetings in the US to advise enthusiastic fund managers on one of the hottest topics in investing: this year's big rally in the Japanese stock market.

"There are two types of views on Japan -- there's bullish and there's very bullish," said Evans, a Hong Kong-based Asia equity analyst for HSBC Securities Inc.

"That is clearly where people's biggest interest is at the moment," he said.

Foreign money, nearly two-thirds of it from North America, has piled into Japan in recent months, fueling a 27 percent jump in the Tokyo Stock Exchange's benchmark NIKKEI 225 Index since May and feeding record-high trading volumes.

Overseas investors plowed a net ¥4.753 trillion (US$40.6 billion) into Japanese shares from July to September alone -- more than half of last year's total -- and now account for 60 percent of daily trading, according to Tokyo Stock Exchange data. A quarter of all shares listed in Tokyo are currently owned by non-Japanese investors.

The surge is supported by new optimism about the world's second-largest economy and may even sap momentum from Wall Street as investors look across the Pacific.

But analysts also warn the party could end with a hangover amid concerns about a global slowdown, the US dollar's rise and a suspicious absence of Japanese buyers.

Underscoring the rally, trading volume hit an all-time high of 4.558 billion shares on Tuesday for the 1,600 companies listed on the Tokyo exchange's first section -- more than that day's combined turnover on the New York Stock Exchange and the NASDAQ.

Japanese stocks had lost about 80 percent of their value between late 1989 and 2003, as the country struggled with a burst real-estate bubble, sluggish corporate earnings, rising unemployment and mountains of bad debt at the nation's banks.

Now, Japan's steady economic recovery makes the stock market seem like a bargain-priced safe haven, while concerns about inflation and interest rate hikes in the US undercut enthusiasm for Wall Street, which has mostly flatlined this year.

US and other foreign investors "are looking to diversify their risks," said Stuart Cox, who manages US$223 million invested in Tokyo through the JP Morgan Japan Equity Fund. And Japan's economy is "starting to stand on its own two feet."

Cox predicts the NIKKEI will approach 16,000 by the end of next year, compared with Wednesday's close of 14,072.20, which was just shy of a four-and-a-half-year high.

Japan's economic growth was recently upgraded to 3.3 percent in the April-June quarter from an earlier estimate of 1.1 percent. The banks' bad loans are largely behind them, and land prices are rising for the first time in 15 years.

Unemployment has ticked up a bit since dropping to 4.1 percent in June, its lowest since 1998, but rising wages have spurred consumer spending and companies have increased investment.

But Japanese investors, not fully convinced that the economy is really pulling out of its 15-year slump, have largely been absent from the market's rally.

Japanese were net sellers of about ¥1.258 trillion in shares in September, according to the Tokyo Stock Exchange.

To be sure, risks do abound, including growing competition with other Asian rivals like South Korea, particularly in electronics, and possible slackening demand from the US, a key export market.

"The Japanese stock market is very sensitive to the world economy," said Seiki Orimi, a strategist at UFJ Tsubasa Securities in Tokyo. "I believe the current movement is very much driven by short-term investors."

He predicts the stock boom will begin to taper in April, and that foreigners will start taking profits in the second half of next year.
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