TOKYO MARKET: Overseas buying boosts confidence

JAPAN's benchmark stock index may rise this week to levels untested for almost two years on a wave of overseas buying. The Nikkei 225, that last week rose 2.8 per cent to 17,932.47, may trade between 17,500 and 18,500 as global fund managers up the weight of Japanese stocks in their portfolios. Foreigners have been net buyers almost every week for the last six months, encouraged by mounting evidence the world's second-biggest economy is closer to turning the corner.

Buyers may get another green light tomorrow, when the Bank of Japan releases its quarterly tankan survey of business sentiment. Some traders say a second-straight quarter of improvement may lift the Nikkei above 18,000 for the first time since September 1997 - led by steelmakers, retailers and recession-hit domestic industries.

"The market's been factoring in signs of economic recovery in a predictable manner, and we see the benchmark rising as high as 18,500," said Kiyoshi Kimura, general manager at Societe Generale Securities. "What's concerning us is that foreigners seem to be looking at Japan through rose-coloured glasses: one day they might start seeing that things aren't that great."

With the market coming off its best week in a month, some domestic institutions - more skeptical than their foreign counterparts about Japan's prospects for recovery - are expected to take chances to unload long-held shares, including banks.

Economists forecast the tankan, the key confidence index for large manufacturers may rise to minus 36 in the second quarter, from 47 in the first quarter - not a strong enough improvement to frighten bond investors that the central bank will change its policy of keeping rates close to zero. The benchmark 10-year bond yield closed the week at 1.665 per cent.

Some investors worry that share prices have outstripped companies' earnings potential, especially in the case of exporters and other globally-oriented companies.

"Even if the tankan is on target, valuations are so high that it's hard to justify further buying," said Hajime Yagi, a manager at Meiji Dresdner Asset Management. "And we can't ignore the risk that we might actually fall short of economists' forecasts."

And sellers don't have to look far to find evidence the economy isn't out of the woods yet. Figures released Tuesday showed Japan's industrial output fell in May to its lowest in five years, amid sluggish consumer and corporate demand.