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Solid Japan earnings key to pushing Nikkei above 16,000

TOKYO -- Tokyo stocks have been largely directionless in July, with the Nikkei Stock Average hovering around 15,400. This is mostly because pension funds, which helped boost the market through June, have reduced their stock purchases. Also, foreign investors have increasingly been adopting a wait-and-see stance toward Japanese stocks now that share prices are trending higher across the globe.

     Many experts are saying earnings for the April-June quarter, which companies will begin releasing in earnest in two weeks, will be the decisive factor determining whether the Nikkei Stock Average breaks through the psychologically important 16,000 threshold.

     In early Tokyo trade Monday, individual investors sought out incentive-based issues, including consumer finance lenders Aiful and Orient, machinery maker Mitsubishi Kakoki Kaisha and gas and energy company Iwatani. Overall trading was thin, with day traders and other retail players leading the way. That is because the U.S. markets were closed Friday for the Fourth of July holiday, and domestic institutional investors stayed on the sidelines regarding Japanese stocks.

Drawn by incentives     

Shares in Aiful and other nonbanks drew attention because of a report that the ruling Liberal Democratic Party is considering raising the maximum interest rate by amending the Money Lending Business Act. Behind the investor interest in Mitsubishi Kakoki Kaisha and Iwatani are growing expectations that demand for hydrogen stations -- the equivalent of gas stations for fuel cell vehicles -- will increase now that Toyota Motor announced last month it will start selling such cars in Japan by the end of fiscal 2014.

     Volatile stocks have seen heaving trading, often regardless of earnings and other fundamentals. Japan Communications, the Jasdaq-listed mobile virtual network operator, ranked first in trading volume in early Tokyo trade Monday. Aiful and Mitsubishi Kakoki Kaisha came in second and third, overtaking popular issues on the TSE's first section, including SoftBank and Toyota.

     Recent trading in Tokyo has been led by those individual investors whose investment muscle got bigger thanks to the bull run.

     Meanwhile, data released by the TSE on Thursday shows that foreign investors became net sellers of Japanese stocks for the first time in four weeks in the week through June 27. Trust banks, which mainly manage funds provided by pension funds, turned net sellers for the first time in nine weeks. Individual investors were net sellers for the seventh straight week, but their share of overall trading rose to roughly 31%.

     "The influence of individual investors is growing stronger as the ratio of foreign investors falls below 60%," said an official at Mitsubishi UFJ Morgan Stanley Securities.

Return to fundamentals

Although there are concerns that active purchases of incentive-based issues could trigger market volatility, developments on Monday suggest fundamentals may have more influence on share prices in the near future. Take, for example, Mazda Motor, whose stock briefly rose 3% Monday. Takashi Oba, senior strategist at Okasan Securities, said investors appear to have concluded that the carmaker will post strong earnings because car sales in China jumped 37.2% on the year in June.

     The stock price of Asahi Group Holdings, one of Japan's largest brewers, rose after The Nikkei reported Saturday morning that the company's group operating profit for the six months ended June 30 is expected to come to more than 40 billion yen ($389 million), up roughly 10% on the year.

     By contrast, shares in major mall operator Aeon tumbled after it was learned that the company's group net profit for the March-May quarter fell 90% on the year.     

     "Japanese companies that close their books in March are preparing to release their first-quarter earnings, so foreign and domestic institutional investors are putting more emphasis on fundamentals," said Oba.

     Nonetheless, for the overall market to rise to the 16,000 mark -- a level reached at the end of last year -- leading issues will need to move higher on the back of purchases by overseas investors who think Japanese stocks are on an uptrend, said a strategist at a Japanese online brokerage. The NT ratio -- obtained by dividing the Nikkei average by the Topix index of all TSE first-section issues -- was a record low 12.02 based on the price at the end of Monday morning trade. While shares in first-section companies across a wide range of sectors are being bought, leading Nikkei 225 component issues, including export-related stocks, are lagging.

     With the earnings season set to get into full swing in roughly two weeks, investors are gradually going back to the basics -- putting emphasis on corporate earnings. It will not be long before it becomes clear whether that shift is what it takes to send the Nikkei average above the 16,000 line.

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