TOKYO MARKET: Foreign investors sense signs of recovery

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The Independent Online
JAPAN'S benchmark stock index may trade around 18,000 this week as foreign and domestic investors watch for further signs that the world's second-largest economy is improving. They may also sell shares in companies that have risen to records recently, on concern that share prices don't justify their earnings potential.

The Nikkei average rose 0.03 per cent last week, its sixth straight week of gains, to close at 17,937.73. It is currently 18 per cent above its average price over the last 200 days and traded above 18,000 for four days last week. With buying from foreigners and individuals expected to support the market, domestic investors - more sceptical than their overseas counterparts - are expected to take chances to unload long-held shares. Foreigners were net buyers of Japanese equities last week for the 23rd week in the past 24.

Investors will keep a close eye on the results of Thursday's industrial production figures for any indications that manufacturers are enjoying higher demand. They will also watch for the release of June bankruptcies on Wednesday.

Bonds are seen little changed as the central bank's low-rate policy keeps yields from surging despite expectations that the government will increase bond sales to support fiscal stimulus measures. "It's indispensable to give maximum support to the economy by means of monetary policy in order to stabilise prices and boost the economy," said Iwao Kuroda, a director of the Bank of Japan, speaking before the upper house of parliament. "A supportive central bank continues to keep bond yields under control," said Xinyi Lu, a chief strategist at Paribas Capital Markets.

"The lack of economic releases and bond auctions next week should give the bond market a breather."

Last week, the benchmark 10-year bond fell, pushing the yield 2 basis points to 1.674 per cent. The BOJ last cut the target for the interbank overnight loan rate - comparable to the US Federal Reserve's fed funds rate - on 12 February and then poured thousands of billions of yen into the banking system to guide the rate to virtually zero. It has been unchanged since 5 April at 0.03 per cent.

The yield on the 10-year bond is 164 basis points higher than the overnight lending rate, down from the six-month average of 166 basis points, making it attractive to invest in bonds with funds borrowed on the money markets.