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Winged Nikkei VETERAN investors well remember the last time Japan's benchmark Nikkei index closed at 20,000, the sort of round number that pundits call "psychologically significant". It was in April 2000, and the Nikkei went on to shed more than half its value over the following three years. So it was unsurprising that the dominant emotions elicited by the news on April 22nd that the Nikkei had closed above that level were shock and some foreboding. Earlier in the month, as the index approached the threshold, the economy minister suggested that there might be a "small bubble". For the non-Japanese buyers who normally dominate trading in Tokyo, the market presents a conundrum. In 2013 many of them piled into Japanese shares on hopes that Shinzo Abe, the new prime minister, would rid the economy of deflation by means of monetary easing. When the economy stalled last year, many sold their holdings. Scepticism about "Abenomics" remains. But Japan's stockmarket is one of the best-performing in the rich world this year in dollar terms; staying away is turning into a "pain" trade, says Peter Tasker of Arcus Research, a consultancy. Local pundits, meanwhile, warn that the recent bull run could soon end badly. Since the Nikkei peaked at 38,916 in 1989, real or rumoured "price-keeping" operations by the government to stem its decline have become commonplace. In October the Government Pension Investment Fund (GPIF), the world's biggest public-sector investor, with ¥129 trillion ($1.08 trillion) under management, said it would put more of its money in equities, in line with global benchmarks. Over the past year or so, Japanese shares have gone from around 12% of its portfolio to an estimated 22%, sending a wall of yen into the stockmarket. Other public pension funds are following the GPIF's lead. Meanwhile, state-owned Japan Post, which has a big financial-services arm, recently announced a plan to boost returns by investing in riskier assets (for which, read equities). The Bank of Japan, as part of its monetary easing, has been snapping up exchange-traded funds. When all this comes to an end, bears aver, the market rally could peter out.

Winged Nikkei

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Page 1: Winged Nikkei

Winged Nikkei

VETERAN investors well remember the last time Japan's benchmark Nikkei index closed at 20,000,the sort of round number that pundits call "psychologically significant". It was in April 2000, and theNikkei went on to shed more than half its value over the following three years. So it wasunsurprising that the dominant emotions elicited by the news on April 22nd that the Nikkei hadclosed above that level were shock and some foreboding. Earlier in the month, as the indexapproached the threshold, the economy minister suggested that there might be a "small bubble".

For the non-Japanese buyers who normally dominate trading in Tokyo, the market presents aconundrum. In 2013 many of them piled into Japanese shares on hopes that Shinzo Abe, the newprime minister, would rid the economy of deflation by means of monetary easing. When the economystalled last year, many sold their holdings. Scepticism about "Abenomics" remains. But Japan'sstockmarket is one of the best-performing in the rich world this year in dollar terms; staying away isturning into a "pain" trade, says Peter Tasker of Arcus Research, a consultancy.

Local pundits, meanwhile, warn that the recent bull run could soon end badly. Since the Nikkeipeaked at 38,916 in 1989, real or rumoured "price-keeping" operations by the government to stemits decline have become commonplace. In October the Government Pension Investment Fund (GPIF),the world's biggest public-sector investor, with ¥129 trillion ($1.08 trillion) under management, saidit would put more of its money in equities, in line with global benchmarks. Over the past year or so,Japanese shares have gone from around 12% of its portfolio to an estimated 22%, sending a wall ofyen into the stockmarket.

Other public pension funds are following the GPIF's lead. Meanwhile, state-owned Japan Post, whichhas a big financial-services arm, recently announced a plan to boost returns by investing in riskierassets (for which, read equities). The Bank of Japan, as part of its monetary easing, has beensnapping up exchange-traded funds. When all this comes to an end, bears aver, the market rallycould peter out.

Page 2: Winged Nikkei

The shift by state-owned investment fundshas undoubtedly boosted prices, saysKathy Matsui of Goldman Sachs, aninvestment bank, but it has also made thegovernment more exacting aboutcorporate governance at the firms intowhich public pension pots are being sunk.Corporate profits have been risingstrongly, especially among exportersbenefiting from a weaker yen. Japan'sfirst corporate-governance code, whichwill go into effect in June, and a

stewardship code intended to improve oversight by institutional investors, are already promptingfirms to return more profits to shareholders through buy-backs and higher dividends.

Moreover, the Nikkei, points out Nicholas Smith of CLSA, a broker, is a simple average of shareprices, not weighted by the size of the company. The Topix index, a broader, weighted measure, doesnot show shares on quite such a tear. It is still 12% below its last peak in mid-2007, althoughcorporate profits have risen by 13% (see chart).

Yet it remains to be seen whether the government can make the stockmarket appealing to ordinaryJapanese savers. It has had a dire record on corporate governance and, not coincidentally,emerging-market levels of volatility. All of that continues to deter Mrs Watanabe, the archetypalJapanese housewife who oversees the family finances, constraining bullish hopes.

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