Foreign Fever For Japan Makes Sense
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Foreign investors are heading for Japan like bees to a honey pot. US-based Japan funds have attracted $5.5bn so far this year – and more than half of this sum has arrived in the past fortnight. Between January and September, net foreign inflows into Japanese equities reached $63bn, almost as much as the total in 2004.
But while a stampede towards a market by foreign investors is often a contrarian indicator, this exuberance looks rational: the latest rise in the stock market to four-year highs should mark the beginning of a long-term bull run as Japan is now finally recovering from over a decade of stagnation.
The latest evidence of genuine long-run improvement comes from the banking sector, says Jonathan Allum in The Blah. Year-on-year total bank lending turned positive in August for the first time in years, and the trend accelerated in September. Meanwhile, office vacancy rates fell to a near four-year low and rents have also finally started to rise.
Deflation is on the way out, according to the Bank of Japan, and consumption is improving. Throw in rising business investment and a healthy financial sector and it’s clear that this economic recovery, unlike the previous two, is sustainable, says a Merrill Lynch research report. Slimmed down corporations, whose margins are at post-war highs, should grow earnings rapidly once deflation ends, while the market looks attractively valued on a prospective p/e of 16. The Nikkei, now at over 13,000, is set to hit 14,500 by next June and 19,000 in 2008, reckons Merrill Lynch.
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