Market poised to test even higher ground

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The Nikkei average hit a 40-month closing high of 20,726.99 Monday, mirroring a leap in investor sentiment.

In the current market environment, where optimism abounds, the key market gauge could soon test still higher ground around 21,500, although occasional volatility would be inevitable.

The key downside factor in recent months was seasonal corporate selloffs to unwind cross-shareholdings toward the March end of the business year. Investment trusts meanwhile have stepped up purchases and so have individual investors.

With signs of economic recovery in sight in Japan, foreign investors now appear poised to increase purchases of Japanese equities again.

Attention is focusing on the massive maturity of time deposits in postal savings accounts.

Some 106 trillion yen in fixed-term deposits in the government-run postal savings system will mature in the next two years, more than 10 trillion yen of it in April alone.

Given the nation’s low interest rates and the favorable equity market environment, much of the money could be switched to stock investment.

A batch of recent official figures gave a contradictory picture of economic prospects, however.

Last week’s figures showed a 3 percent month-on-month rise in industrial production in February, the second-consecutive monthly increase, while the nation’s unemployment rate stayed at 4.9 percent, the highest on record.

Still, a solid pickup in capital investment in information and other sectors could presage more favorable developments on the macroeconomic front in the coming months.

Indeed, a good number of firms are painting a bright picture of earnings for the year ahead and listed companies as a whole are now expected to wind up the current fiscal year with a double-digit increase in pretax profits.

Judging from a continuing flow of money into U.S. investment trusts and the favorable supply-demand balance, steep falls in New York share prices appear unlikely in the near term.

The dollar-yen rate, another focal point, appears likely to move between 102 yen and 107 yen for the time being, with expectations of economic recovery in Japan working in the yen’s favor.