While Eyes Are Elsewhere, Japan's Stocks Start a Rally

06/04/2014 12:01 am EST

Focus: GLOBAL

Jim Jubak

Founder and Editor, JubakPicks.com

Even though global attention is on Europe, China, and the US at the moment, MoneyShow's Jim Jubak implores you to take a moment of pause to consider the current goings-on of Japanese stocks.

I know that global attention is on the European Central Bank before Thursday's meeting, on China's economy, and on the rally in US Treasuries, but spare a moment for Japanese stocks.

The Tokyo Stock Exchange Index, the TOPIX, posted its highest close overnight since March, after climbing for a ninth day. The Nikkei 225 Index rose 0.7% and the TSE Mothers Index of smaller companies gained for an eleventh day. That's the index's longest winning streak on record.

That's quite a turn around for Japanese stocks. The TOPIX is still down 5.7% for 2014, record among the 24 developed markets tracked by Bloomberg. The Index was up 51% in 2013.

What's behind the rally in Tokyo and can it continue?

  • A declining yen against the dollar as traders anticipate that US economic growth will rebound in the second quarter.

  • Relatively cheap valuations that are attracting portfolio managers leery of US prices and not totally thrilled with scant EuroZone growth. The TOPIX traded at 1.2 times book value today compared with 2.7 times for the US Standard & Poor's 500 and 1.9 times for the Stoxx Europe 600 index. Even with allowance for the difference in the way that Japanese companies treat book value, the Japanese market is cheaper.

  • Anticipation that the Government Pension Investment Fund is about to increase its allocation to Japanese stocks. The chairman of the fund has said that he doesn't see a 20% allocation as excessive. The allocation is currently 17%. The Japanese health ministry has just released its review—undertaken every five years—of public pensions. That review is required before the $1.26 trillion Government Pension Investment Fund can change its asset allocations.

  • An expectation that a move by the Government Pension Investment Fund to buy stocks (including overseas stocks) and sell Japanese government bonds will further weaken the yen. (Japanese stocks go up when the yen falls, all things else being equal.)

The Government Pension Investment Fund will probably reveal its new allocations in August. Until then, Japanese stocks are free to run higher in anticipation of a big policy change. And best of all, until the fund announces its new portfolio, no one can be disappointed.

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