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Japan's searing stock rally pauses for breath, and validation

Published 28/04/2021, 05:01
Updated 28/04/2021, 05:06
© Reuters.

© Reuters.

By Junko Fujita and Kevin Buckland
TOKYO, April 28 (Reuters) - A scorching rally in Japanese
shares that appeared to have run ahead of economic prospects has
stalled, but analysts are betting it will resume as early as
mid-year as the country's heavily cyclical stocks thrive on
global growth.
A world-beating 33% rally in the Nikkei 225 .N225 from the
end of October has faltered around the 30,000 mark since
mid-February, even as other major stock indexes reached for new
highs almost every week, led by U.S. equities.
Faith in the recovery from the COVID-19 pandemic that had
made the Nikkei the darling of investment bets on global
reflation has faltered. Japanese investors have turned cautious
about pushing the index back to levels not seen since the bubble
economy burst in the early 1990s.
Japan's own economic outlook has also dimmed, with Tokyo in
a third state of emergency and the pace of vaccinations well
behind global peers. Only 1% of Japan's population has been
vaccinated, compared with at least 40% in both the United States
and Britain, according to a Reuters tracker. Despite those headwinds, Nomura, Societe Generale and Nikko
Asset Management are among those predicting a rally to as high
as 32,000 in the coming months.
"Investors are now in wait-and-see mode, but that implies
they are accumulating potential buying power," said Yunosuke
Ikeda, Nomura's Tokyo-based chief equity strategist.
Japan is in the middle of corporate earnings, and Ikeda
predicts strong guidance from energy, iron and steel, and
transportation equipment companies – which are tied to global
growth -- will stir a turnaround in sentiment that will be
further buoyed once the pace of vaccinations picks up by June.
"I think the mood will change very clearly, that's my
bullish view," he said.
Frank Benzimra, Societe Generale's Hong Kong-based head of
Asian equity strategy, is equally bullish, predicting the Nikkei
will ride a U.S.-led recovery to 32,000 this year.
"The reflation trade has further to go," he said.
Meanwhile, Nikko Asset Management's Tokyo-based chief global
strategist, John Vail, sees the Nikkei rallying to 31,500 once
the Tokyo 2020 Summer Games, due to begin in July, are out of
the way.
"Japan is going to have to sacrifice its economy and its
happiness for a while to ensure a safe Olympics," he said,
explaining that Japan is being careful about reopening its
economy in order not to risk a flare-up in infections.
But he sees that lag as an opportunity to play catch-up
subsequently, with vaccinations also picking up pace by that
time.
The Nikkei is down 5% from a Feb. 16 peak in a ferocious
selloff that saw Japanese institutional investors shedding some
5.16 trillion yen ($47.4 bln) of shares so far this year,
including almost 50 billion yen by insurers in the latest week,
which was the most in nearly two years, according to Tokyo Stock
Exchange data.


NLI Research Institute's Tokyo-based chief equity
strategist, Shingo Ide, takes the opposite view to Nomura,
blaming inflated earnings expectations for the Nikkei's
struggles. That was apparent earlier this month, when shares of
electric-motor maker Nidec 6594.T and robot manufacturer
Yaskawa Electric 6506.T plunged even after announcing strong
results.
"The Nikkei hit 30,000 too early," he said, adding that
based on Japanese companies' price-earnings ratios, the gauge
should be around 27,000.
Yet, as the U.S. expansion continues apace and China's
growth remains robust, the Nikkei will claw its way back to
30,500, according to Yoshihiro Takeshige, general manager at the
investment management department of Asahi Life Asset Management.
"It's just a matter of time," he said. "The environment
surrounding Japanese manufacturers is improving."
Scott Gilchrist, who manages an A$650 million ($503 million)
portfolio of Japanese and Korean stocks at Australia's Platinum
Asset Management PTM.AX , is also staying sanguine.
"Investor psychology has weakened a bit, but it hasn't
changed what the businesses are seeing," he said.
"Japanese corporates have had it pretty tough for two or
three years, and we've had six months or a year of half-decent
times, so I think it would be quite surprising if the cycle
ended so soon."

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