Japanese stocks are forecast to rise 4.5 percent this calendar year, extending a bull run that began in 2012, but worries over global trade and a weak economy are expected to limit the upside, a Reuters poll found.
Japanese stocks have had a volatile year, by Thursday's close standing 8 percent off a 26-year-high hit on Jan. 23, following a fall in the Nikkei benchmark to six-week lows on Wednesday.
Most recently they have been pressured by the Italian political crisis, the U.S.-China trade spat, and concerns over whether tension between the U.S. and North Korea will be eased.
Still, medians from 18 analysts and fund managers polled by Reuters in the past week suggest stocks will rise again by year-end as investors take on more risk, spurred by a strong U.S. economy.
The Nikkei share average is expected to trade at 23,800 at year-end, up more than 7 percent from Thursday's close of 22,201.82, the median forecast shows. It is seen trading at 24,000 for mid-2019 and 24,500 for end-2019.
Forecasts for end-2018 ranged from 21,000 to 26,000. They were 20,000 to 28,500 for mid-2019. In the previous poll in February, forecasts ranged from 20,000 to 28,000 for end-December 2018.
In the United States, the combination of a tightening labour market and firming inflation supports expectations the Federal Reserve will raise interest rates next month and again later in the year. That is helping to prop up the dollar.
"Japanese stocks should be supported by a likely strong dollar to the yen after the Fed hikes rates, while rising demand for goods is expected to lift consumption in Japan later this year before a planned tax hike next year," said Fumio Matsumoto, a senior fund manager at Dalton Capital Japan.
Japan plans to hike sales taxes to 10 percent from 8 percent in 2019 and introduce measures to mitigate the impact on the economy, such as tax cuts on home and vehicle purchases.
WEAK EARNINGS ESTIMATES
Forecasts for Japan Inc's earnings this year are weak, sapped by uncertainty over this year's volatile foreign exchange rates. For now, most companies base their dollar-yen rate at an average of 105 yen this fiscal year, versus about 109 yen on Thursday.
A weaker yen boosts Japanese manufacturers' profits made abroad when repatriated. If the yen trades weaker against the dollar, companies' profit estimates are expected to be lifted some time this year.
Analysts say companies expect a rise of a mere 2 percent in pre-tax profits for the fiscal year ending March 2019, compared to gains of 19 percent posted in the previous year.
"Companies' profit forecasts are conservative," said Nobuhiko Kuramochi, a Mizuho Securities strategist who thought the Nikkei would recover its 26-year high of 24,124 as soon as July.
"Because there are hopes that their April-June earnings will be strong, investors would think that companies will revise up their annual forecasts and stocks will take heart from that."
But Kuramochi said the Nikkei was likely to exhaust the gains towards year-end, as investors' attention will be back on global risks. Kuramochi expects the Nikkei to trade at 21,000 in end-2018.
WEAK ECONOMIC DATA TO KEEP ACTIVITY IN CHECK
Data released on Thursday show Japan's industrial output was well short of market expectations in April, adding to fears for the outlook after the economy contracted in the first quarter.
Japan's economy contracted more than expected at the start of this year, suggesting growth has peaked after the best run of expansion in decades.
"Japan's economy is not faring as strong as we had expected. The market was overly optimistic over exports and capital expenditure," said Fujio Ando, senior managing director at Chibagin Asset Management, who expects the Nikkei to trade 22,000 at the end of the year, adding that worries over the strong yen are likely to linger.
"If the yen strengthens, the BOJ will probably want to keep its policy loose."
A recent Reuters poll showed the Bank Of Japan was likely to wait longer than initially expected to exit its super-easy stimulus, with almost half predicting that would not happen until 2020, or later, given sluggish inflation.
For years, the BOJ has desperately tried to fan inflation to a target of 2 percent by heavy buying of bonds and other assets and, more recently, capping borrowing costs at around zero percent. But consumer inflation has remained stuck at about 1 percent.
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