Japan's Nikkei average will gain 20 percent this year, its biggest rise since 2005, with investors pinning their hopes on more policies to tackle the euro zone debt crisis and strong earnings to entice foreign investors back to Japanese stocks. The Nikkei is predicted to rise to 10,125 by the end of the year, according to the median forecast of 18 analysts polled by Reuters, recently.
Optimism has ebbed since March, when a 30 percent increase was forecast in a similar poll. A deepening euro zone debt crisis and increasing signs of slowing growth in the United States and China led the Nikkei to shed around 20 percent from its one-year high of 10,255.15 on March 27 to a six-month low on June 4. At its peak the benchmark was up over 20 percent for the year after losing more than 17 percent in 2011.
The equities sell-off was led by foreign investors, who make up around two-thirds of the Japanese market, as they pocketed earlier gains. A firmer yen, which meant shrinking revenues for Japanese exporters, was a double blow for those already facing dwindling demand for their products. But market watchers are now expecting the Nikkei to rally in the latter half of the year beyond its March high as the global economy bottoms out and the "flight-to-quality" trend slows down.
"We should see a temporary, cyclical upturn in the autumn as structural adjustments continue," said Seiki Orimi, a senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities. "But there could be a big tail risk if the gap between the euro zone's core and peripheral countries isn't closed." Risk appetite has been impinged in the second quarter by political stalemate in the euro zone over solutions to a seemingly intractable debt crisis, but there are hopes that discussions on fiscal integration, starting with joint euro bonds, could soothe frustrations.
Some analysts anticipate strong domestic second-quarter results, which would make Japanese stocks more attractive. Many already boast positive valuations after the Nikkei slid in the second quarter, despite April's robust earnings season when 60 percent of firms exceeded or met market expectations. Foreign investors were net buyers of Japanese stocks in the week ended June 15 for the first time in nine weeks, while their net purchases of Japanese bonds shrank slightly.