A Merrill Lynch & Co.-Gallup survey of 42 Japanese fund managers, taken in April, shows a surge of bullish sentiment toward the Tokyo market.
But the now-choppy market seems to belie that optimism.
According to the poll, bulls outnumbered bears by 73.8% for a three-month market outlook. The percentage was up from 49% in March and 40.4% in February.
Thus, for the first time since January, Japanese fund managers preferred their own stock market to those of other major countries and regions both on a three-month and 12-month view. (However, on a 12-month view, the bulls weighed in at 57.2% - the lowest percentage of bullishness registered for the period reported.)
But on April 1, the Nikkei-22 Stock Index finally breached the key 21,500 resistance line. Although that was good news to some investors, it evoked concern among others, who expected it might prompt a correction. Twice in the 1990s - in 1992 and in 1994 - the market weakened after reaching index levels near or just above 21,500. As a result, investors question when, and under what conditions, the market can sustain levels above 21,500.
In a market where valuations remain relatively high and prices are still well below their 1989 peak, investors realize that even a surge in bullishness could be easily derailed. Worried investors point to continuing financial woes in Japan and the possibility of modest tightening of monetary policy.
Technical considerations also affect short-term sentiment.
"We think the market is in a one- to two-month consolidation phase," said Ken Hoshino, president of Daiwa International Capital Management in New York, a unit of Tokyo-based Daiwa International Capital Management. After the market broke through 21,500, "some people thought it was time to take profits, and the total market has been hesitating," he said. However, Daiwa is maintaining its positive medium-term outlook, and the firm expects upward momentum to resume in about two to three months.
Compared with the bullishness in the Merrill Lynch poll, Nomura Investment Management Co. Ltd., Tokyo, is more "cautiously optimistic," said Brian X. Fitzgibbon, a senior vice president of Nomura Capital Management Inc., New York.
In a recent report, the firm attributed March's market gains to "confidence in a slow but steady recovery of the Japanese economy underpinned by the dollar's renewed firmness." But although Japan's corporate profit growth should be improving this fiscal year, Nomura and some others see the possibility of clouds forming on the horizon, especially if bond yields rise because of strengthening domestic consumer demand, which could fuel inflation, along with the weakening yen.
Thus, Nomura has not made any dramatic shifts lately, said Mr. Fitzgibbon. For instance, Nomura is holding its near-neutral 39% weighting to Japan for broad Morgan Stanley Capital International Europe Australasia Far East accounts, he said.
Ryujiro Miki, general manager of the investment planning department of Dai-ichi Seimei Capital Management in Tokyo, said that "from here, people expect the Bank of Japan to tighten monetary policy a little bit." That in turn should result in a modest correction, followed by another move up in the market, he said.
Despite such cautious perspectives on the near term, a number of observers see reason to be optimistic for the longer term.
For instance, while corporate profits should grow 18% to 20% this fiscal year, Daiwa's Mr. Hoshino believes overall growth will be moderate, not requiring sharply higher interest rates.
Moreover, he pointed out domestic demand should be increasing for Japanese equities. One major source of the demand: the 23 trillion Pension Welfare Service Corp., Tokyo. That pension fund has said it wants to reinvest much of the 5 trillion of assets now held in insurance companies' general accounts. Much of the reinvested assets are expected to go into stock and bond markets.
Over time, ongoing pension deregulation in Japan should prove positive for domestic equities. "Our clientele consists of primarily large Japanese corporate pension sponsors," said Lawrence Repeta, president of Frank Russell Japan Ltd. in Tokyo. "And it's clear that our clients are making significant structural changes to their portfolios. As a result, I believe that over the next couple of years, large pension sponsors will continually increase their exposure to equities."
Japanese pension sponsors are becoming increasingly concerned about the funding of their pension liability, Mr. Repeta said. To avoid higher company contributions, they want to obtain better investment returns - which they expect from equities.
But that increased exposure will happen over time; for now, even some foreign managers are looking at Tokyo's market with a slightly skeptical eye. Nicholas Reitenbach, international investment director of Pinnacle Associates in New York, said his firm has no exposure to Japan. Not only does Pinnacle see better opportunities elsewhere, especially in Asia, but the firm expects the yen to continue weakening against the dollar, which hurts returns of U.S.-based investors in Japan.
"It's too early to get overly bullish on Japan's market," said Arthur A. Micheletti, chief economic and investment strategist with Bailard, Biehl & Kaiser, San Mateo, Calif."We have had false starts on the Japanese economy and market for almost every one of the last four years. Maybe this time there will be a turnaround. But I prefer to wait and see if there is a follow-through."
Now, 5% of Bailard, Biehl's $1 billion total assets are invested in Japan, which is a neutral position, said Mr. Micheletti. However, if the firm sees more evidence of recovery - for example, if April's economic reports show continuing improvement - the firm might shift to a modestly overweighted exposure.
Michael Perelstein, international investment director of MacKay-Shields Financial Corp., New York, is taking heart from the results of the Merrill Lynch-Gallup poll, along with the signs of economic recovery. To him, the "tremendous selling by Japanese institutions in the past fiscal year have ended. " And now, amid the diminished pressure to take big loss writeoffs, Japanese institutions can "think about markets again in a reasonable way," he said. And in their quest for the highest return, "it seems that Japanese equities are appealing to them," he said. "That is a major switch that will provide real upside to the market."
And it's also good news to MacKay-Shields, which has about a 40% Japan exposure in its international accounts.