Japanese share prices may struggle to extend a rebound given concerns about the health of the global economy, high oil prices and a weak dollar, analysts said Friday. Political events could also keep the market cautious, with the winner of the race to succeed Prime Minister Shinzo Abe set to form a new government.
Japanese shares rebounded over the past week after a larger than expected US interest rate cut sparked a global stock market rally. Over the week to September 21, Tokyo's benchmark Nikkei-225 index advanced 185.19 points or 1.15 percent to 16,312.61.
The broader Topix index of all first-section shares inched up 7.36 points or 0.48 percent to 1,552.07.
But the rally ran out of steam late in the week on worries that the US rate cut may not fully resolve a global credit squeeze. Investors, nervous about the health of the Japanese economy, will be closely watching a slew of domestic data due next Friday on unemployment, consumer prices and industrial production for August, dealers said.
"As there are so many important indicators due next week, investors will trade cautiously," said Toyo Securities strategist Hiroaki Hiwata, who expects the Nikkei to remain within a range of 16,000 to 16,600 points.
"In addition, worries over the outlook of the US economy - namely inflation fears - will persist as the prices of gold, oil and commodities are getting excessively high," he said.
Japanese share prices surged by about 3.7 percent on Wednesday alone after the US Federal Reserve slashed interest rates by a half-point to try to limit the fallout from the world-wide credit crunch, dealers said.
But the Nikkei closed down 0.62 percent on Friday, following Wall Street lower on renewed caution about the outlook for the US economy as well as rising crude oil prices, dealers said.
Fujio Ando, the fund manager at Chiba Bank Asset Management, said high oil prices "may be a reflection of excessive liquidity after the Fed rate cut."
"The Fed's decision cannot completely eliminate fears of a US economic slowdown because the cheaper dollar could cause inflation that in turn may raise prices of gasoline, hurting low-income households who tend to be borrowers of subprime loans," he said.
"In addition, the stronger yen against the dollar could hit Japan's corporate earnings for the first half, which are due next month," said Ando, who expects the Nikkei to remain between 15,500 and 16,500 points next week.
Markets will be watching to see who wins this Sunday's ruling party poll to pick a replacement for outgoing premier Abe, although analysts doubt the outcome will have much immediate impact on stocks.
The latest polls and media reports say Yasuo Fukuda, 71, a seasoned veteran and foreign policy dove, is the frontrunner to be the next prime minister, as he holds a lead over former foreign minister Taro Aso.
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