Land of rising sun warms up to investors

October 19
8:15 AM 2015

Despite down 12.7 percent from the 52-week high of 20,952.71 points, Japan's Nikkei offered 27.89 percent return for 2015 so far and the last two sessions of the previous week further indicated the upward momentum in the market.

But the latest strengthening of Yen is taking some of the sheen off the market. However, market analysts see under current potential in the Japanese stock markets. Mainly five reasons -- attractive valuations, corporate developments, shareholders value, corporate earnings / RoE and Abenomics program-- are making Japanese financial markets attractive for overseas investors. 

Corporate developments such as new corporate governance, shareholders value as dividend payout ratios are increasing, share buyback is at new high, corporate earnings would be 30 percent higher than 2012, the structural reforms taken by Japanese Prime Minister Shinzo Abe's Abenomics program is expected to boost financial markets.

Japanese stock market recorded encouraging gains during the first half of 2015, but eroded gains from July onwards. Nikkei 225 index closed 1.08 percent higher on 6 October in Tokyo at 18,291.90 points.

The overall one-year returns of the index are estimated at 27.89 percent though it was down 12.7 percent from 20,952.71 points, its 52-week high. Analysts consider investing through exchange traded funds (ETF) route for foreign investors is a better choice than investment fund for investing in the Japanese market. 

ETFs offer low-cost way for overseas investors to tapJapanese market or an index. For instance, iShares MSCI Japan ETF or iShares currency hedged MSCI Japan ETF are suitable for foreign investors to access Japanese stock markets, advise financial analysts. Since overseas investors pay in US dollars or British pounds, the currency factor or headache of foreign exchange conversion is eased off.

Japanese stock market was considered to be sluggish for overseas investors for few years, but the situation is totally changed. Now, the Japanese market started attracting overseas investors, who prefer short-term gains. 

Japan's public pension fund with over $1trillion assets has charted an aggressive business plan. As part of this, the pension fund is gradually shying away from bonds and moving closer to stock markets. This has been supporting the Japan's Nikkei.

Where Japan's benchmark index will go further? The Nikkei 225 index closed the last week at 18,291.80 points, with a gain of 194.90 points or 1.08 percent. Japan's Nikkei is outperforming the world indices this year so far. The role of Japan currency is main trigger for overseas investments into the world's third largest economy. 

Though it remained flat against the US dollar, it started recovering. Japan economy is growth is almost flat. There are concerns that it would return to deflation. S&P500 index is almost flat or weaker and FTSE is just over two percent, while Nikkei is trading over eight percent this year so far. Prime Minister Shinzo Abe is implementing structural reforms to boost economy growth.

The recent ease of Nikkei can be attributed to the strengthening of Yen. The worries over Chinese economy slowdown, Yuan devaluation and a slump in commodities market have been impacting the global markets including the world's third largest economy.

This created risk aversion. Yen against US dollar was 106.365 on 16 October 2014 whereas now, it down 18 percent as on 6 June to 125.6 and from this level onwards Japanese Yen started recovering to 118 against US dollar.  

The Bank of Japan's (BoJ) meeting is scheduled on 30 October and giving more hopes of policy support.  The recovery in consumer spending and moderate wage growth have been marking positive signs for the Japanese financial markets.

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