Analysis / Japan’s stock market has strong profits, BOJ support

Bloomberg SINGAPORE (Bloomberg) — With Japan regaining its place as the second-biggest stock market amid growing trade tensions between the world’s two largest economies, investors expect the nation’s equities to garner more attention.

Japanese shares were worth $6.15 trillion on Friday compared with just under $6 trillion for Chinese equities, according to data compiled by Bloomberg. The markets swapped position behind the United States for the first time since 2014, making Japan Asia’s biggest stock market.

While Chinese stocks have suffered recently from the country’s ongoing trade spat with the United States, their Japanese peers have benefited from improved earnings and the Bank of Japan’s annual purchase of up to ¥6 trillion in exchange-traded funds. Still, market observers are divided over what impact the mounting trade war might have on Japan.

“If China and the U.S. are going to throw bricks at each other’s windows, it pays to be the one that sells glass to both sides,” said Nicholas Smith, an equity strategist at CLSA Ltd. “That’s Japan.”

The TOPIX index has lost 4.1 percent this year, compared with a 17 percent slide in the Shanghai Composite Index.

Nearly 60 percent of companies listed on the Japanese benchmark that have reported earnings so far for the latest quarter have beaten analyst expectations.

“We’ve seen some pretty big beats from some big companies including Sony, Hitachi and Fujitsu. That’s the major driver,” said Kieran Calder, head of Asia equity research at Union Bancaire Privee.

He expects the positive trend in Japanese earnings to continue. First-quarter results suggest room for upward revisions of company guidance, which tend to be conservative at the start of the fiscal year, he said. With many firms basing their forecasts on the yen at 105 per dollar, the current level serves as a tailwind for those sensitive to currency movements, Calder added.

Japan regaining the No. 2 spot calls attention to its “market thrashing consensus earnings forecasts” as well as its relatively appealing valuations, CLSA’s Smith said.

Japan remains dependent on external economies such as China and the United States as well as on a weaker yen, said Yoshinori Shigemi, global market strategist at JPMorgan Asset Management. Corporate earnings should remain solid “as long as we see a continuing strong expansion in the U.S. economy, and action by China to support their economy by increasing fiscal spending and easing monetary policy.”Speech

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