Tokyo stocks could move higher this week with high oil prices already factored into the market, high-tech issues seen as oversold and investors becoming more assured that Japan's economic fundamentals are strong.
"I've been bearish for a couple of months, but I'm beginning to think the fundamentals are not too bad," said Garry Evans, a strategist at HSBC Securities.
"The risks of slowdowns in the US and China are pretty much known and I suppose the risk is on the upside now," he said.
Traders expect the Nikkei average to trade between 10,800 and 11,100. Any climb would build on a 1.32 percent rise last week when the Nikkei ended at 10,889.14.
The index hit a three-month closing low of 10,687.87 on Monday, hurt by the surge in oil prices and soft Japanese gross domestic product data (GDP) for April-June, released the previous Friday.
But market participants said concerns that the weaker-than-expected GDP numbers meant growth was peaking now looked exaggerated.
Oil prices may also be starting to weigh less.
On Friday, the Dow Jones industrial average rose 0.69 percent to 10,110.14 while the Nasdaq Composite Index climbed 1.0 percent to 1,838.01 despite a jump in NYMEX crude to a record high of $49.40 a barrel at one stage.
Oil prices later eased to close below $48. If worries about oil prices and their impact on world demand are fading, that could make many stocks, in particular technology issues, look undervalued, traders said.
Japanese tech shares have been battered since late April when investors began moving out of semi-conductor, PC and liquid crystal display (LCD) stocks amid fears of falling prices and a supply glut.
Since hitting a year-to-date closing high of 12,163.89 on April 26, the Nikkei has shed 10.5 percent while the electronic appliance sector sub-index has lost almost 17 percent.
"Issues that have seen some big falls will see some buying. Among high-tech stocks in particular, there are issues that are some 30-40 percent off their year-to-date highs," said Masaru Ueda, head of investment strategy at Marusan Securities.
Tech shares that showed signs of turning round last week include electronics conglomerate Toshiba Corp and Sharp Corp, the world's biggest maker of LCD televisions.
Toshiba gained 4.9 percent on the week but is still 30 percent off its year-to-date high of 576 yen. Sharp rose 3.5 percent to 1,516 yen last week, although it is still 28 percent below its year-to-date high of 2,100 marked on April 26.
Another focus will be merger-and-acquisition activity, which seems to be picking up in Japan.
Investors will watch moves surrounding struggling bank UFJ Holdings Inc and its two rival bidders as well as the mounting domestic and international interest in its troubled borrowers, notably retailer Daiei Inc.
The consumer finance sector could see some major announcements with UFJ expected to pick a winner for its Aplus Co Ltd, and a decision may also be made on who could win a major stake in the sector's top company, Takefuji Corp.
An announcement is expected on the government's plan to sell its stake in wholesale power utility Electric Power Development Corp (J-Power) next month in what could be the biggest initial public offering (IPO) in Tokyo in six years.
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