Japan stocks to rise

Japanese stocks are forecast to rise 5 percent over the rest of this year, with stronger corporate profits expected to underpin sentiment, but selling by foreign investors could cap the upside, a Reuters poll found. In recent weeks, Sino-US trade frictions and a selloff in emerging market currencies have heightened risk aversion, pushing Japanese stocks to one-month lows, as investors flocked to the safe-haven yen. A stronger yen cuts Japanese manufacturers' profits made abroad when repatriated.
But an easing in US-Mexico trade tensions over the North American Free Trade Agreement (NAFTA) provided relief to the market this week. Although lingering trade frictions could limit the upside, Japanese stocks will move up steadily towards the end of the year but then flatline, according to median estimates from 26 analysts and fund managers polled by Reuters in the past week.
The Nikkei share average is expected to trade at 24,000 at year-end, up 5 percent from Thursday's close of 22,869.50, the median forecast showed. It is also seen trading at 24,000 at mid-2019 and end-2019.
Forecasts for end-2018 ranged from 22,000 to 26,000. They were 19,000 to 27,500 for mid-2019. In the previous poll in June, forecasts ranged from 21,000 to 26,000 for end-December 2018. US Federal Reserve Chairman Jerome Powell last week emphasised the central bank's push to raise interest rates despite Trump's criticism of higher borrowing costs.
"We can expect a strong US economy, and the dollar-yen rate is higher than what most Japanese companies have expected this fiscal year. An expected Fed rate hike will likely prop up the dollar against the yen," said Jun Kitazawa, an equity strategist at Miki Securities, who forecast the Nikkei to trade at 24,000 at year-end and 25,000 in mid-2019.
"Despite stronger Japanese corporate earnings outlook, Japanese stocks' price-to-earnings ratio has fallen to around 13 times, making them attractive."
However, analysts say foreign investors' massive sell-off in Japanese equities on concerns about a global trade war could possibly offset some of these positive factors.
"Companies' earnings have been better than expected, but foreigners have sold around a net 8 trillion yen since the beginning of the year," said Toru Ibayashi, executive director of Wealth Management at UBS Securities.
"So it shows how the market is being supported by the Bank Of Japan's buying of exchange traded funds."
Exchange data this week showed foreign investors have sold a net 8.03 trillion yen in Japanese cash equities and futures since the beginning of the year. Ibayashi expects the Nikkei to trade at 22,000 at end-2018 and 24,000 at mid-2019.
Companies reported an increase of 19 percent in their pretax profits for the April-June period, while analysts expect their annual pretax profits to rise 11.4 percent for the fiscal year ending March 2019, according to Daiwa Securities. Daiwa expects companies to raise their conservative outlooks when they report mid-term results later this year.
For now, most companies base their dollar-yen rate assumptions at an average of 107-108 yen this fiscal year. The dollar traded at about 111.25 yen on Thursday.
"The midterm earnings season this fall will likely serve as a tailwind to Japanese equities. The market may start posting gains in November," said Hiroyuki Nakai, an executive fellow at Tokai Tokyo Research Center.
Nakai expects the Nikkei to trade at 24,500 in end-2018.
Market participants also said a strong Japanese economy and upbeat capital spending could lift investors' risk stance. Japan's economy grew 1.9 percent on an annualised basis in April-June, helped by strong household and business spending, data showed earlier this month.
Capital expenditure rose 1.3 percent, marking the biggest gain since October-December 2016. "Japanese companies' managers are eager to invest. Machine tool investment data also shows that domestic demand is intact," said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities. But he warned that Japanese manufacturers could be hit by falling demand from China.
Fujito said the Nikkei could try 23,500 before year-end but sees the benchmark index falling to 22,000 next year. Negative risks include a slowdown in consumption in the wake of a planned tax hike and emerging market weakness, which could offset the US economic boost. Japan plans to hike sales taxes to 10 percent from 8 percent in 2019.