Despite signs of economic recovery, doubts remain over the Tokyo stock market’s prospects.

The government’s latest economic report shows that the diffusion index of leading indicators for March stayed well above the boom-or-bust line of 50 for the third month in a row.

Indeed, many companies are now forecasting a V-shaped recovery in profits in the current business year.

Yet, the upbeat economic and corporate earnings reports have gone largely unheeded on the stock market in recent weeks, perhaps indicating a case of buy on the rumor, sell on the news.

The New York stock market has rebounded strongly in recent days, but uncertainty about the future persists.

There is little dispute that the U.S. economy has snapped out of its slowdown, but some analysts fear the recovery will be tepid at best.

At least the Tokyo market has begun showing a degree of resilience to downward pressure, however.

There is talk that the recent downturns in Tokyo share prices prompted public pension funds to step in to keep share prices from falling further.

Nonetheless, developments on the domestic political front have proved disappointing

A key government panel is rumored to remain opposed to a sweeping tax reform plan. But since Japanese financial leaders assured their Group of Seven partners at the latest G7 meeting in Washington last month that they will push for tax cuts to revitalize the economy, the government must now live up to that commitment.

A broad outline of tax cuts is expected to be made public ahead of the next G7 meeting in mid-June.

Tax cuts will no doubt undermine the government’s effort to put its financial house in order, however, and could prompt foreign credit rating agencies to downgrade Japan’s sovereign ratings again, a typically bearish scenario for Tokyo stocks.

Investors are now opting for industrial sectors that are benefiting from a pickup in orders from Japan’s Asian neighbors, which are more dependent on the U.S. economic recovery than Japan.

Among the issues favored by them are those in the paper-pulp, chemical, steel, nonferrous metal and automotive sectors.

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