Japan’s stock market rally could have much further to run

Japan's stock market is experiencing a rally unmatched since the 1980s, says Brad Frischkorn in The Wall Street Journal. The Nikkei 225 is trading around 11,400, a level last seen in 2008. Since the rally began in November, Japanese equities have risen by more than 30%, making Tokyo the best-performing major market in the past three months.

The yen's 14% slide against the dollar over the past four months, and expectations of further initiatives from central bankers, are drawing investors into the "long-dormant" market. The new government, headed by Prime Minister Shinzo Abe, has pledged to beat the deflation that has dogged Japan for over a decade. Haruhiko Kuroda, head of the Asian Development Bank and a possible candidate to head the Bank of Japan, told Bloomberg that he was expecting growth of 2% or more for 2013.

So is now the right time to buy? Investors "have been bitten many times by the seductive notion that the land of the rising sun is emerging from its bear-market night", says Robert Cole on Breakingviews. "They would be forgiven for shying away this time." That might be a mistake.

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Reuters' data, notes Cole, suggest that Japanese corporate earnings should grow by 22% this year, nearly twice the world average. What's more, the MSCI Japan index currently trades on a price/earnings (p/e) ratio of just under 14. That's on par with the US, and slightly higher than Europe, but it is below the global average p/e of the last two and a half decades of 30.

It is also lower than 90% of weekly readings for Japanese equities since 1988. Japanese shares are paying a more generous average dividend of 2.2%, compared to yield of below 1% for two-thirds of the period since 1988.

Investors who have been burned before might point out that the Nikkei is still 71% below its record close at the end of 1989, says The Wall Street Journal. However, with the "reinvigorated", business-friendly Liberal Democratic Party back in power, strategists believe that interest from global funds, which have avoided the market for so long, could "fuel this rally for several more months".

Wealth manager Lorne Steinberg tells The Wall Street Journal that any sign that the Japanese government's policies are working "could trigger an equity-market rally lasting two to three years". So there could be plenty of scope for further gains.

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