Is rebound in Japanese stocks for real?

While stocks globally took a beating last week on worries about U.S. monetary stimulus ending and economic growth in China slowing, one major market staged a quiet comeback.

Japan`s Nikkei closed the week with a rise of over 4 percent, marking its first weekly gain in five weeks. The stock market opened 1 percent higher on Monday on weakness in the yen, before retreating slightly to trade flat around 13,227.
"Clearly a lot of volatility remains in global equity markets, but we believe that the Nikkei is on a generally upward trend," said Makarim Salman, head of Japanese financials research at the brokerage Jefferies in Tokyo. "The yen is on a weakening trend and the earnings outlook has improved for Japanese corporates."

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Analysts said a move above 12,600 last week was positive for the Nikkei and the market should target the 14,500 level in the months ahead.
The Nikkei was knocked off a five-and-a-half year high in May as concerns about an end to US monetary stimulus , doubts about whether Japan`s radical economic policies can lift the economy out of the doldrums and a rebound in the yen encouraged investors to take profits on the market`s double-digit gains this year.
"The weaker yen is helping exporters and that`s the only difference between the Nikkei and other Asian markets," said Desmond Chua, a market analyst at CMC Markets in Singapore.
The yen has weakened almost 5 percent against a broadly-robust dollar since hitting a two-month low earlier this month.
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That`s helped Japanese stocks recover almost 7 percent from a two-month low hit in mid-June. Compare that with the SandP 500, which is down about 2.8 percent over the same period, and European shares which are down almost 3.5 percent.
Japan`s Topix index, which some analysts believe provide a better idea of underlying trends in Japanese stocks, is up more than 6 percent from a two-month low hit earlier in June.
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"Short-term volatility is still there given uncertainty over the Fed [US Federal Reserve], but we might start factoring in the positive impact of Japanese policies again and [Prime Minister Shinzo] Abe`s policies are also becoming a bit clearer," said Chua.
Abe is widely expected to step up his efforts to reform Japan`s economy and improve its long-term growth prospects after next month`s elections to the upper house of parliament. On Sunday, the LDP made big gains in a Tokyo assembly election, which analysts say bodes well for the LDP`s performance in next month`s elections.
- By CNBC.Com`s Dhara Ranasinghe, Follow her on Twitter @DharaCNBC

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