Japan's Nikkei share index is expected to be up 12 percent this year, partly on hopes that central banks around the world will eventually lift flagging global demand with their monetary easing although the gains will be limited by China's economic slowdown and a listless domestic economy.
The Nikkei is predicted to rise to 9,500 by the end of the year, 6.7 percent higher than the September 26 close of 8,906.70, according to the median forecast of 22 analysts and fund managers polled by Reuters over the past week. Market analysts cite the persistently strong currency, sought as a safe haven in times of global uncertainty, as one of the reasons for lower expectations than in the June poll, when the Nikkei was forecast to gain 20 percent in 2012. The index has not made it past the 9,300 level, which would mark a 10 percent increase on the year, since May.
Nevertheless 2012 is likely to be the first yearly gain for the Nikkei since 2009, when it leapt by 19 percent. The European Central Bank pledge to buy Spanish and Italian bonds and a third round of monetary stimulus from the US Federal Reserve have given a new lift to world stocks in recent weeks. "With the US, Japan and Europe all easing the risk-off mood is likely to reverse ... The base is getting stronger," said Ryota Sakagami, chief strategist of equity research at SMBC Nikko Securities.
The Bank of Japan expanded its asset purchase programme on September 19, fending off fears of inaction from the central bank after policy shifts in Europe and the United States and helping the Nikkei reach a five-month high of 9,166.52 on the same day. However, the 10 trillion yen of additional bond purchases announced failed to weaken the currency, which continues to pressure Japanese exporters by eroding their revenues garnered overseas once repatriated, and making them less competitive.
"Demand and corporate earnings have come under pressure from the perennially strong yen, and from the 'China risk'," said Norihito Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley. "There aren't many investors willing to go all-out on the Nikkei, so it continues to underperform."
The Nikkei is currently trailing gains in US and European indexes, at just 5.3 up on the year as of September 26, compared to the S&P 500, up 14.6 percent on the year, and the STOXX Europe 600 index 12.8 percent up. Concern about the exposure of Japanese firms to China, where demand is flagging and a territorial dispute has sparked boycotts of Japanese goods, has also made the Nikkei less attractive to investors.
"I think the market focus is China's slowdown and when emerging markets will recover," said Tetsuro Ii, chief executive of Commons Asset Management. The Nikkei China 50, an index of 50 Japanese companies with significant exposure to China, is currently down on the year by 2.4 percent. Domestically-oriented firms sheltered from the risks of a strong yen have generally fared better so far this year, and helped the Nikkei recover nearly 10 percent from a year-to-date low of 8,238.96 struck on June 4 to a two-month high on July 4.
Poll respondents said they expected domestic demand to be driven by the post-tsunami reconstruction effort, and anticipates a spike in consumption ahead of a consumption tax hike in 2014. Fujio Ando, managing director at Chibagin Asset Management, favoured firms involved in construction, airlines and real estate, while others recommended buying raw materials whose prices bottomed out in September.
While deflation remains a concern investors are now eyeing a change of governor at the BOJ next year and hopes of a move to bring down the yen. They also see a governmental election before the end of the year as another possible turning point for the Nikkei. "Right now polls indicate that the Liberal Democratic Party (LDP) could return to power," said Ryota Sakagami, chief strategist of equity research at SMBC Nikko Securities. "We could therefore see a shift in BOJ policy and a push for infrastructure-related investment."
Sakagami said he saw a big potential gain for exporters if the new administration managed to rein in the yen against the dollar. Meanwhile concern about the euro zone debt crisis have eased after the ECB moved to curb the most heavily indebted nations' borrowing costs, but investors remain wary of a new flare-up. "We have to watch out for Spain becoming another Greece," said Fumiyuki Nakanishi, general manager of investment and research at SMBC Friend Securities.
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