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New prime minister Shinzo Abe's first ten days in office couldn't have gone any better as far as the stock market is concerned. I'm reminded of the political catalyst last September in which former PM Koizumi won a snap election -- securing the path towards privatization of Japan Post -- followed by a 27% gain in the Nikkei until year's end.

Over the last eight trading days the Nikkei 225 Stock Average has gained 5.2% to 16,449.33, reaching multi-month highs to levels we haven't seen since mid-May.

Following former PM Koizumi's election victory last September 11th ('05), the Nikkei gained 4% over the next eight trading days and 27% by the end of the year to finish at 16,111.43.

I think we could see another nice rally through the end of the year based on the following:

1. SENTIMENT

  • Downward trend in oil prices
  • Buzz/hype over new Dow highs

2. Japan's economic recovery --> EXPANSION

3. WEAK YEN

  • Note this is negative for U.S. investors buying ADRs, ETF, funds...

4. BoJ monetary policy: "GRADUAL" rate hikes

5. The list goes on to include increased presence of private equity firms, M&A opportunities, and rising dividend payout.

For a good source of learning about developments in Japanese equities including "under the radar" Japanese stocks that aren't traded in the U.S. check out Pascal Jeannenot's Japan Investments newsletters.

Mr. Jeannenot specifically discusses dividends in his latest newsletter. I agree with him that blue-chips are the focus of the rally and that mid- and small-caps are being ignored -- the latter representing a compelling investment opportunity (hint hint). The problem is how to invest in these areas for the average non-Japanese investor. Mutual funds may be the only way to go.

iShares MSCI Japan Index ETF (EWJ) 2-year chart:

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Disclosure: I do not own shares of any companies/ETFs mentioned in this article.

Source: Nikkei Quietly Rallying - Expect a Repeat of '05?