December 28, 2013 1:00 pm JST

Things looking (mostly) up for Japanese stocks in 2014

TOKYO -- Market insiders expect the Nikkei Stock Average to hit 18,000 in 2014, likely toward the end of the year, according to a new Nikkei Quick News survey. If the experts are right, it would be the first time for the benchmark index to jump that high since late July 2007.

     On average, the 10 survey respondents see the Nikkei average reaching 18,380. Some think the index may climb to 20,000 in the second half, with corporate earnings buoyed by a weakening yen and economic recoveries at home and abroad. Hopes for real estate companies, which stand to benefit from a domestic rebound, are running high. Automakers and other major exporters are also expected to perform well.

     The aggressive easing program the Bank of Japan introduced in April has raised the prospect of an end to deflation -- long the bane of the nation. Takashi Maruyama, head of the equity fund management department at Nikko Asset Management, said investors' attention will shift to whether stable yen depreciation and wage increases will deal deflation a couple of death blows. The pace of capital spending, and whether increased corporate investment improves Japan's fundamentals, will also be a focus.

     Some respondents noted that with Tokyo set to host the 2020 Summer Olympics, more foreign investors may take a fresh look at Japan.

     Even if the market does make it to those lofty heights, however, there are likely to be bumps on the way up. Respondents predicting a sustained uptrend were in the minority.

Beware the tax hike

One key factor to watch is Japan's consumption tax increase. On April 1, the 5% rate is to be raised to 8%. Many experts think this could usher the stock market into a summertime correction phase.

     To mitigate the impact, the Japanese government has unveiled economic stimulus measures worth about 5.5 trillion yen ($51.9 billion). Yet Norihiro Fujito, head of investment information at Mitsubishi UFJ Morgan Stanley Securities, said there are only a few measures that can directly underpin household income. There are persistent concerns that, after a last-minute consumption spree before the hike, sales will plunge. 

     The survey respondents' average projected low for the Nikkei index is 14,000. As in 2013, tensions between Japan and China will remain a worry, as will other geopolitical risks.

     If Sino-Japanese friction worsens, the trade volume between the two countries will decrease, said Kiyoshi Ishigane, chief strategist at Mitsubishi UFJ Asset Management. This, Ishigane said, may hurt exporters' earnings.

     Some respondents also suggested that China's shadow banking system -- a vast web of largely unregulated lenders -- could come into the spotlight. 

     Many experts are also concerned about excessive increases in U.S. long-term interest rates. The Federal Reserve Board will start scaling back its quantitative easing, and if it goes smoothly, it will help to push the yen lower against the dollar. However, Takeru Ogihara, chief strategist at Mizuho Trust & Banking, said a surge in U.S. long-term rates might raise doubts about the Fed's exit strategy.

Consistent investment

Regarding the fund supply-demand balance, many respondents do not foresee Japanese stocks gaining momentum quite the way they did at times in 2013. Nevertheless, the experts do expect money will continue to flow into the Japanese market from abroad. Some predict the total amount of investment from overseas will increase, with foreign players putting cash into Japanese stocks over a longer period of time.

     Selling pressure from retail investors looks likely to ease in 2014, after building ahead of the end of tax breaks in the 2013 year-end on capital gains and dividends. There are also expectations that the Government Pension Investment Fund will generate buying incentives for Japanese investors by increasing its holdings of domestic shares.