View from City Road: Japan reaches turning point

The spectacular surge in Japanese share prices that kicked off the week should be no surprise to readers of the Independent. Last week we said that despite market, economic and political gloom, it was wrong to panic.

The analysis still holds: the Japanese economy is slowly approaching a turning point. The immediate reason for the 1,471.24 rally in the Nikkei average was the passage of political reform bills last Saturday. Throw in an economic stimulus about to be announced - worth a whopping pounds 85bn - and you have the makings of a real stock market rally.

This week, at least, cheerfulness is likely to persist; in the medium term, it is beginning to look as if the Japanese market is on the turn.

Unlike the three previous efforts, the new package will include income tax cuts, which should have a real impact on domestic demand once the measures take effect. The stimulus announced last summer should also be feeding soon into the economy.

And though it will take much of this year for the fall in corporate earnings to flatten out, a change of trend is in the pipeline. With the package acting as a cushion, a floor to the economic downturn is in prospect.

At some point over the next six months, the markets will begin to discount a real recovery in earnings next year. Until then a risk remains that the market will see-saw.

But for investors taking a medium-term view and willing to accept hiccups, Japanese securities look attractive - especially relative to other, higher-priced overseas markets.