TOKYO MARKET: Signs of recovery boost domestic issues

JAPAN'S benchmark stock average, the Nikkei 225, may climb back above 18,000 this week as signs of economic recovery encourage investors to add domestic, demand-led issues to their portfolios.

Retailers, banks and other groups whose fortunes rise and fall with the domestic economy may pace gains.

Meanwhile, a retreat by exporters such as Honda Motor may cap gains as investors worry that the strong yen is hurting Japan's overseas earnings.

Japanese bonds are likely to be little changed as auctions may draw tepid demand amid concern that the government will sell more debt to fund its supplementary budget, aimed at lifting the economy.

The Nikkei average fell 2.7 per cent for the week, its first week of retreat in three, as a yen near its highest level in six months prompted investors to sell exporters. The Nikkei closed at 17,599.37 on Friday.

Retailers such as Seven-Eleven Japan and other domestic issues may pace gains. On Friday, the government said spending among households with a salaried worker rose 1.8 per cent in July, seasonally adjusted, after falling 2.4 per cent in June.

The Japan Electrical Large Stores Association said that sales at large stores rose 6.7 per cent in July from a year earlier to $2.4bn - that was the 16th straight year-on-year increase.

"We expect to see money shift from exporters to domestic demand-related issues," said Hiroyuki Nakai, general manager of the research department at Nippon Global Securities.

Investors will pay close attention to economic indicators, including figures on industrial production, unemployment and household spending for July.

Exporters may continue to be under selling pressure as signs of economic recovery could lead to a stronger yen.

"Yen-dollar trading is still unstable," said Shigeharu Shiraishi, managing director at SG Yamaichi Asset Management, which oversees pounds 13bn in assets. "Concern over earnings remains unless the yen falls near 115 to 120 [to the dollar]."

Exporters such as Honda Motor, Japan's third-largest car maker, may fall as each one-yen drop in the value of the dollar costs it several billion yen in operating profits.

Bridgestone, Japan's largest tyre maker, is expected to announce its half-year earnings on Monday after the market closes. Investors will scrutinise the results to see if the yen's rise has had an impact.