The Tokyo stock market opened the month moderately higher Monday, but the rally soon fizzled, dashing hopes that the Nikkei average would soon hit 12,000.

Initially, the market reacted calmly to the May 31 lowering of Japan’s sovereign debt rating by Moody’s Investors Services Inc. and the realignment of Morgan Stanley Capital International indexes the same day.

Although concerns over the potentially demoralizing factors have eased to an extent, the Tokyo market appears set to continue struggling, especially given the continued weakness in New York share prices and the dollar.

Listed firms as a whole are forecasting a 62.6 percent year-on-year profit increase for fiscal 2002 in a turnaround from a 41.6 percent fall the previous year, but investors remain unmoved and the surprisingly robust projections have yet to be factored into share prices.

Based on the projections, the average price of Tokyo stocks is heading to around 27 times earnings, the lowest price-to-earnings ratio since the beginning of fiscal 2000.

By comparison, the previous low for the past two years was a P/E of 35. This can be taken to indicate that the average price remains far below its fair value and that the market has room to lift the Nikkei average back above 14,500 later in the year.

Still, investors appear to be fearing hiccups in an economic recovery largely fueled by a pickup in export earnings. Worries also remain over the threatened failures of heavily indebted firms.

It is encouraging to note, though, that foreign investors have remained net buyers of Japanese stocks in recent weeks, chalking up 811 billion yen in net purchases for May alone, on top of 120 billion yen the previous month.

Nonresident investors have increased purchases of Japanese stocks at the cost of the New York Stock Exchange. Judging from the growing flow of foreign capital into the Tokyo market, there appears a good chance that the Nikkei will reclaim 12,500 later this month, even if the NYSE remains in a holding pattern.

Investors are now opting for low-priced, incentive-backed shares and cyclical issues sensitive to domestic demand. Attention may shift to auto, electronic parts and other high-technology issues later this month.

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