Waves of foreign selling have washed over the Japanese equity market in recent weeks, shrinking index levels after months of steady gains. But the rout has not deterred equity strategists, who still see the Japanese market in a medium-term rising trend.
The correction might have been prompted to some extent by worries about corporate restructuring in Japan, but mostly the downturn came simply as investors from abroad opted to take the profits they had won during the long upswing of the past year, analysts say.
The Topix index should fluctuate within a trading range of 1,450–1,700 for the next six months, according to Kathy Matsui, Goldman Sachs’ chief strategist in Tokyo. It now stands at around 1,320.
Charles Lambert, market analyst at Jardine Fleming, agrees that trading during the summer is likely to be dull, with market participants worrying about the performance of shares in the technology-laden US Nasdaq index. But by the end of the year, Jardine Fleming expects the Topix to have risen to around 1,850.
“There is some uncertainty about the political outlook and fiscal policy, and uncertainty about the continuity and pace of corporate restructuring – and global events,” says Matsui. On a one-year view, she predicts, the index should reach 1,800.

Recent weakness in the market may have been disappointing, but Yukiko Kawamoto, head of Japanese equities at HSBC Asset Management in Tokyo, says the team had not changed its bullish view on the market in the medium-term.
“Industrial production started to grow last summer, and expenditure started to grow in the autumn... the economy is on course for recovery,” she says. HSBC maintains its forecast for the Topix to reach 1,900 by the year-end.
To some extent, the market was holding its breath ahead of general elections due to take place at the end of June. But Goldman Sachs forecasts earnings will be up by more than a quarter compared with last year’s profit figures, and that inflation is likely to stay at current low levels.
“The corporates are still restructuring... they’re cutting costs and profits are generally rising – I think the market will respond to that,” said Lambert.
Despite fears in the market that Japanese companies could become complacent about the whole restructuring process and lose the will to push difficult changes through, Matsui is more optimistic. “We think the restructuring will not just pick up, but the quality of it will improve,” she says.

There have been many false dawns in recent years for the ailing Japanese economy, but Kawamoto agrees that this time corporate management is serious. However, there was still a huge difference in tempo from company to company and from industry to industry. But eventually, the need to turn firms around would spread further afield.
“It’s just a matter of time before we see serious restructuring in some old economy industries, such as petrochemicals,” she says.
Asset managers are starting to see changes in Japanese corporate structures first hand, in the form of presentations made directly to the fund managers. “They are becoming more market-oriented, and starting to worry about their share prices – this is something new for Japanese companies,” says Kawamoto.
The market has a good chance of rebounding once the foreign selling stopped, she says. “Domestic retail investors have money and are very interested in investing,” she says. However, confidence was still volatile, particularly following the recent collapse in internet stock prices.
For the next six months, share price performance in the various industrial sectors is unlikely to diverge significantly. “It will be safe to stay close to the index,” says Matsui. But looking further ahead, pockets of growth should emerge in consumer sectors and pharmaceuticals in particular, she adds.
Lambert says upside is likely to remain limited for shares in the telecommunications sector until current pressure on phone operating company NTT to relax charges succeeds. “That should be resolved by the summer.”
Since the share prices for Softbank and some of the internet stocks have come down recently, now could be a good time for investors to head in that direction, says Lambert. And machine tool company shares were particularly attractive, he added.
“It’s been 10 years since there has been a phase of capital spending,” he says, adding the whole sector will benefit when it does happen.
Despite its reluctance, the Bank of Japan is expected to maintain its zero interest rate strategy. Domestic economic growth is simply not strong enough to justify a change in monetary policy at this point, market stategists say.

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