Tokyo Market: Foreign investors regain hope

JAPAN'S key stock average may climb toward a four-month high this week, lifted by foreign investors hopeful that conditions for economic recovery are improving both internally and externally. Surging US shares, which point to a strong market for exporters and signs the government may be more consumer friendly, are also helping.

"Sentiment from overseas is more optimistic than it has been for a good 12 months," said Fiachra MacCana, head of research at WestLB Securities Pacific. "There is this pent-up demand, certainly amongst North American investors, to increase their weightings in Japan from historically low levels."

Investors say the benchmark Nikkei 225 average may approach 15,500, a level untested since early August. Foreign brokerages were net buyers of Japanese shares every day last week, during which the Nikkei rose 1.9 per cent, to 15,069.4.

"[Foreign investors] are saying, `We sold off XYZ stock because we thought the US was going to tank, and we were wrong; it's moving the other way'," said Mr MacCana. He expects foreign funds to flow back into Japanese companies "that benefit from a strong US economy."

Shares in consumer-oriented industries may also rally on expectations that the government will cut taxes further to encourage individual spending. "The government is finally giving the impression that it's listening to the market," said Hitoshi Yajima, director of Tachibana Investment Management. "That's why we were able to get past 15,000." Still, banks and construction companies may lag the market. The country's 18 largest lenders are being criticised for announcing plans to apply for only $47bn (pounds 28bn) of a fund established by the government to replenish their capital.

Government bonds are likely to fall amid expectations that the government will sell more bonds to finance tax cuts to boost consumer spending. Last week, the benchmark government yield rose 17.5 basis points to 1.075 per cent. Fears of an increase in supply grew after the government decided to sell about Y10,000bn of bonds to finance its third supplementary budget for this year. Bonds may also fall if the Nikkei 225 stock average stays above 15,000.

"The bond market was able to keep on rising because there seemed to be no hope for stocks," said Akitsugu Bando, manager at Okasan Capital Management. "But with the Nikkei seemingly supported at 15,000, the picture may have changed."