Tokyo stock prices have bottomed out and started to rise, thanks to the Bank of Japan’s quantitative easing of monetary conditions.

The market has also reacted positively to the inauguration of the reform-oriented Cabinet of Prime Minister Junichiro Koizumi.

Conventional wisdom holds that the stock market accelerates its upward trend when it rises some 30 percent from its bottom.

As measured by market capitalization that clearly reflects market trends, stocks listed on the first section of the Tokyo Stock Exchange are now worth 410 trillion yen, a rise of 25 percent from their bottom in March.

What conditions will help the benchmark 225-issue Nikkei reclaim last year’s high of around 20,000?

Needless to say, the Koizumi administration needs to propose a clear blueprint for reform before the Upper House election in July.

A U.S. economic recovery also needs to occur and create a sense of assurance about stock purchases worldwide.

First of all, however, investors must have enough wherewithal to satisfy their wish to buy stocks. While the nation’s financial sector is full of liquidity due to the BOJ’s quantitative easing of credit in March, the question is whether surplus funds will flow back into the stock market.

Liquidity provided through financial institutions is used to finance loans, overseas investments or purchases of bonds and stocks.

Japanese financial institutions are cautious about lending for fear of fresh bad loans.

Healthy companies, to which they are willing to extend loans, do not need them.

The upside of the bond market looks heavy as it has risen sharply to a level called the “bubble of bonds.”

Besides, a brisk flow of funds to investments abroad appears unlikely in light of numerous losses caused by exchange rate fluctuations.

The stock market is the remaining place to accept surplus funds. And the BOJ seems willing to see such a flow of funds.

Under the circumstances, the current upward trend of stocks is expected to remain stable through much of the coming months, although the market may experience downturns from time to time.

Investors therefore should be bullish about stocks.

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