Brave talk gives stocks fillip

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JAPANESE stocks are likely to rise this week as the government uses a combination of talk and public funds to boost the index before book-closing on 31 March. Financials, construction, real estate and chemicals may show an increase, yet gains may be capped as foreigners sell into the rally to benefit from the year-end high.

Government officials say they want the benchmark Nikkei 225 index at 18,000 by the end of the business year to stop banks and insurers from posting valuation losses on their equity holdings. The index fell 1.35 per cent last week to close at 16,830.47.

On Friday, stocks rose for a second day as public pension funds bought shares in an effort to boost the index. "When the government buys high- priced stocks like Sony it has a big impact because of the weighting on the index," said Yoshio Inamura, manager at Tokyo-Mitsubishi Asset Management.

Stocks also rose after Eisuke Sakakibara, vice finance minister for international affairs, said the government was "prepared to take decisive measures" to support the yen, which fell to a two-month low against the dollar.

Speculation that authorities would sell dollars sent the US currency as low as 128.95 yen, from 131.33 yen, easing concern that foreign investors might liquidate their Japanese equities because a cheap yen pinches their returns. "Signs that the government is going to put its foot down gave the market reassurance," said Tomohiko Yohena, a deputy manager at Izumi Securities.

Bonds have rallied since late January on a dim economic outlook, driving the benchmark yield down about 30 basis points and raising the possibility that new 10-year bonds may bear a record-low 1.8 per cent coupon.

Speculation that the ruling party may propose income tax cuts could hold off buying, some investors said. "If the package of measures does include cuts, then that will hurt bonds," said Shinichi Fukuda, a fund manager at Sumitomo Life Insurance Asset Management. Premier Ryutaro Hashimoto said last week the government will be flexible in its drive to cut its budget deficit.

While many economists call for more spending to revive the economy, some bond investors are starting to worry about growing deficits, which could lead to more new issues and a dampening of demand. What's more, larger deficits could damage Japan's credibility and raise "sell Japan" concerns - the selling of stocks, the yen and bonds - said Yoshiichi Taguchi, portfolio manager at Tokyo Marine Asset Management. "That's scary," he said.