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The Tokyo stock market has been firming back since early August as the deterioration of the supply and demand balance has peaked out amid increased expectations for upward revisions of corporate earnings projections.

Favorable economic data are also contributing to the market’s recovery.

In particular, the rebound is gathering steam as the industrial activity index, released on Aug. 21, has made it more likely that April-June gross domestic product figures, due out Sept. 11, will be better than expected.

The Aug. 30 release of industrial production data for July drew attention from economists wishing to see whether the momentum of the economic recovery has continued into the July-September quarter.

Commenting on the production data, the Ministry of International Trade and Industry said industrial production is expanding gradually.

But production in July unexpectedly declined 0.7 percent from the previous month.

In addition, estimated production in August was little changed from figures announced in July, and September production was forecast to contract 3.4 percent.

Those figures betrayed expectations that confidence in the domestic economy will increase further, and, coupled with July’s family income and expenditure survey released last week, dampened the stock market, which had been somewhat overheated on a near-term basis.

While processors, such as manufacturers of general machinery and electric machinery, are improving earnings, the inventory cycle of the materials sector, other than some high-technology products, is nearing a phase of correction.

This means that the stock market is unlikely to rise on a broad front until the next release of industrial production data and the Bank of Japan’s “tankan” quarterly business sentiment survey.

Selective buying interest therefore will refocus on stocks of companies that have strong earnings and which are expected to expand operations on a medium-term basis.

As a whole, investors are likely to become more selective and fuel polarization of the market.

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