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The Tokyo stock market will probably strengthen in June because surrounding conditions are improving.

The economy is showing clear signs of a recovery.

For example, the industrial production index for the first quarter climbed over a year earlier and the diffusion index of coincident indicators for March hit 56.3, topping the boom-or-bust line of 50 for the first time since December 2000.

The shipment and inventory momentum of the industrial production index, which is closely linked to stock prices, is also improving.

Corporate earnings are expected to rebound sharply in fiscal 2002 as a result of stepped-up restructuring, a pickup in sales and eased deflationary pressure.

The expectation is very practical, as some companies, especially in the technology sector, have made better-than-expected starts in the new fiscal year, while many firms still have elbow room for further restructuring.

The supply and demand situation on the stock market is improving faster than expected, and foreign investors are forecast to become net buyers in order to raise their underweight holding of Japanese shares that have been performing strongly since the start of this year.

In addition, the upper limits on share buybacks announced by companies from the April 1 start of fiscal 2002 through May 16 total as much as 4.8 trillion yen.

Share buybacks are expected to keep increasing as companies have ample cash flow and recognize the presence of credit risks following the removal of full government guarantees on deposits.

Among other contributing factors, companies are now paying greater attention to the cost of equity capital and want to raise their share prices in order to avoid unfriendly takeover bids.

With the economic recovery gathering momentum, selective buying of shares is spreading from international blue chips and export-oriented issues to securities, retailers and other domestic demand-related stocks. And stock trading is increasing in both volume and value.

Those favorable factors as well as tax reforms and other policy measures expected before the June summit of seven major industrial powers are likely to lift the Nikkei average back close to 13,000.

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