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Japan-Update

Reinvigorated Europe making a mark on Japan stocks

Renewed business confidence buoys equipment suppliers and shippers

DMG Mori is enjoying strong European demand for its machine tools.

TOKYO -- The Japanese equities market's strong showing in the new year owes partly to companies with ties to Europe, a region often overshadowed by the U.S. and China but now coming to the fore as it breaks out of its post-crisis doldrums.

DMG Mori rallied for a third straight trading day Tuesday to within 1 yen of its highest level since the start of 2017. Europe, the Middle East and Africa account for more than half of equipment orders at the Japanese machine tool builder, which integrated with a German partner in 2015. The company's shares have gained 76% since the end of 2016, outpacing those of such peers as Okuma.

Looking up again

Japanese machine tool makers have benefited significantly from steadily rising confidence in Europe's manufacturing sector. Machine tool orders from Europe grew 19% on the year to 192.5 billion yen ($1.71 billion) for the 11 months through November, the strongest growth for the period in nine years, data from the Japan Machine Tool Builders' Association shows. Italy and France played a part in this rise, with orders up 58% and 18%, respectively.

Europe's economy had limped along for years after the 2008 global financial crisis, rattled by debt crises in the south. But the region "has finally emerged from the long tunnel and made a comeback as a driver of the global economy," said Osamu Tanaka, an economist at the Dai-ichi Life Research Institute.

Merrill Lynch Japan Securities now forecasts 2% growth in Europe this year, up 0.5 percentage point from its 2018 estimate a year ago.

The Industry 4.0 initiative, in which European manufacturers adopt "internet of things" technology to improve efficiency, is another plus for Japanese companies. Industrial robot builder Fanuc, anticipating growing demand as businesses upgrade to the latest equipment, plans to add more personnel and locations in the region. Chairman Yoshiharu Inaba has said the company seeks a 50% share of the European market for numerical control systems, which serve as the brains of machine tools.

Sanwa Holdings sees growth in operations in Europe boosting net profit to a record high for the fiscal year ending this March. The Japanese shutter maker has been expanding there through dealmaking, acquiring a French door producer in 2016 and turning a British affiliate into a subsidiary last year. Sanwa shares have gained more than 40% since the end of 2016.

Businesses that make money in Europe are attracting European capital. International stockholders held 33.3% of Yaskawa Electric's outstanding shares at the end of September, up 1.6 points from half a year earlier.

"European investors are interested in such points as our business strategy," a Yaskawa investor relations representative said.

Beyond the factory floor

Shippers, too, are riding the wave of strengthening business sentiment. Marine container shipments from Asia to Europe -- including industrial machinery and electronics, for example -- rose 5% on the year to a record 13.24 million twenty-foot-equivalent units, or TEUs, for the 10 months through October. Shares of such Japanese maritime shippers as Nippon Yusen have rebounded from lows plumbed last summer.

Hopes are also high for the Japan-European Union economic partnership agreement that both sides aim to put into effect in 2019. Nomura Securities expects reduced or eliminated tariff barriers on Italian wine and pasta and European cheese to be a boon to such companies as restaurant operator Saizeriya and dairy products trader Lacto Japan.

Political issues seem the only cause for concern at this point. Italy will hold a general election in March, while prospects remain unclear for talks on forming a coalition government in Germany. Put another way, the tailwinds for Europe-linked Japanese stocks could continue for some time.

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