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Stocks

Market Scramble: Relief in Europe gives Japanese equities a lift

Prospect of softer yen against euro buoys EU-facing stocks

TOKYO -- Shares in companies with significant exposure to Europe are making notable gains here as political anxiety fades in the wake of France's presidential election. 

Centrist Emmanuel Macron's victory, and the defeat of far-right candidate Marine Le Pen, brought relief for investors who had worried since the beginning of the year about a crushing blow to the cohesion of the European Union. With such fears in retreat, the euro is climbing.

In the Tokyo market, shares have risen for companies in diverse fields that share "a high proportion of European sales, which positions them to benefit from yen weakness against the euro," in the words of Ryota Sakagami at JPMorgan Chase. They include Minebea Mitsumi, a maker of precision ball-bearings and smartphone components; measurement and medical instrument manufacturer Topcon and bicycle part maker Shimano.

Topcon's stock price has risen by less than 1% since the presidential run-off result was reported here Monday, but by more than 16% since the first round of voting April 23 -- far outstripping the Nikkei Stock Average's climb of 4% over that period. Investors worldwide grew confident in a Macron win after that first round, said an investment director at Fidelity International.

Other names with significant European sales have also outperformed the benchmark, to lesser degrees. Expectations that the euro will gain faster against the yen are encouraging investors to flock to Europe-facing stocks.

The European economy is strong -- a fact overshadowed by political unease. Gross domestic product in the eurozone rose at an annualized rate of 1.8% in the first quarter of 2017, compared with 0.7% growth in the U.S. Amid this recovery, many expect that the European Central Bank may further scale back its monthly asset-buying as early as this year. The different policy directions taken by the Bank of Japan and the ECB could also contribute to a softening of the yen against the euro.

While a weak yen improves profits for Japanese exporters, at 114 yen to the dollar, the currency appears to have less room to retreat against the greenback than before. Many suspect the Trump administration "will move to check the dollar's strength if it reaches the 115-120 yen range," as Minori Uchida at the Bank of Tokyo-Mitsubishi UFJ put it.

On the other hand, the Japanese currency's current level of 124 yen to the euro puts it well above lows of around 135 yen seen in 2015. Daiwa Securities calculates that every slide of 1 yen against the euro lifts pretax profit 0.1% for companies listed on the Tokyo Stock Exchange's first section. This effect is smaller than against the dollar, but a move of around 10 yen would make a noticeable difference.

A tailwind from Europe may be enough to push a plodding Nikkei average past the 20,000 mark.

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