Tokyo flies high on economic recovery

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Japan’s Topix stock index jumped to a 14-year closing high on Thursday, driven by increasing investor confidence that the world’s second largest economy is at last recovering from years in the doldrums.

The news marks another milestone in Japan’s road back to normality after years of deflation in consumer and asset prices.

Paul Sheard, economist at Lehman in Tokyo, said: “The Japanese market has not yet priced in an exit from deflation. I think that’s why it continued to move up today.”

The increase also reassured Japanese investors who had worried that January’s sharp fall in the market – prompted by a raid on internet services company Livedoor – had brought the country’s stop-and-start share price rally to an end.

Analysts said Thursday’s increase was justified by the clear structural improvement in Japan’s economy and its political regime and by efforts to reform the corporate sector.

“Corporate Japan and Japan’s banking system had to be cleared up, and now you’ve got a basis you can really work from for a true recovery. We haven’t had this before in Japan,” Kirby Daley, Asia strategist at Fimat in Hong Kong, said.

Consumer prices finally stopped falling after many years at the end of 2005, according to official figures.

Thursday’s 1.7 per cent rise in the Topix to 1,775.67 finally pushed it above a peak reached in 2000, at the height of the dot-com boom, and to levels not seen since 1991.

The Nikkei 225, the other benchmark index, also finished at a new high, up 1.4 per cent at 17,489.33, the best since July 2000.

Investors, encouraged by the economic recovery, bought stocks focused on domestic demand.

Banking sector stock prices jumped 2.4 per cent, with Mitsubishi UFJ, the world’s biggest bank by assets, up 3.8 per cent at Y1,920,000. Export stocks also contributed, boosted by a rise in the euro to a record high against the yen.

Brandon Ginsberg, co-head of equities at Nikko Citigroup in Tokyo, said until Thursday, traders had lacked the confidence to let the Topix close on a high. But Thursday marked “a break to the upside”.

Mr Ginsberg added that Japanese markets were supported by strong overseas interest. He said hedge funds had returned to Japan, after a temporary waning of interest earlier in the year.

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