In a Business Week article entitled, "Joy Ride for Japanese Stocks," Marshall Gittler, Deutsche Bank's Chief Asian Strategist at DB's Private Wealth Management division based in Singapore, explains why he believes "the rally in Japanese equities has much further to run." Below are some of the reasons behind his bullish sentiment.
• The end of the "lost decade" and the resumption of a normal business cycle, which should allow companies to continue to grow
• A change in the relationship between companies and the capital markets that has forced companies to reorient themselves toward higher profitability
• An increasing appetite for risk among Japanese investors, who will at some point realize that they are too far underweight their home stock market
Eventually they [Japanese investors] will realize that they are seriously underweight their own equity market and will need to start buying. But with both foreigners and Japanese buying, who will they buy from? With more buyers than sellers, the price goes up. That will be the long-term driver of a re-rating of the Japanese market.
In short, the Japanese economy is finally coming out of the "lost decade" and resuming a normal business cycle. Companies can now shift their focus away from reducing debt and towards ensuring future profits and returning funds to shareholders. These changes are consistent with the recent trend towards a corporate governance system that places greater importance on shareholders.
They set the stage for a self-sustaining virtuous circle of economic growth and a continued rise in profits. A stronger economy should boost the risk tolerance of Japanese investors and encourage them to rebuild their equity holdings, which have fallen to unusually low levels.
Click here for a link to the full-text BW article.