The market isn't overheating even though the Nikkei stock average touched the 20,000 level, nor do we believe that overseas markets are overheating right now. Improvements in corporate profits are coming and anticipation of further structural reform in the corporate sector is increasing. Furthermore, the U.S. and European economies are expected to stabilize even more.

Hopes for corporate earnings have been amplified as export volumes have been gradually improving. The impact of Abenomics has been doubted by some as export volumes failed to rise despite the yen's weakness since November 2012, but we are finally seeing some signs of growth in export volumes. This trend of export growth should lead to inventory reductions and increases in capital expenditures. Also the effect is expected to support employment, create more overtime and increase wages. The domestic consumer sector is expected to benefit from this effect. These factors have not been fully priced into the stock market.

Companies are expected to increasingly focus on improving their ROE, and corporate executives are now more vocal about setting targets in this regard. There are two reasons behind the move.

  1. There is a trend to focus more on improving margins.
  2. There is a trend to provide returns to shareholders by providing greater dividends and by conducting share buybacks. Such a move has long been anticipated in Japan and the trend is finally starting to materialize.

These improvements in earnings and corporate behavior are expected to be more visible ahead of shareholder meetings, starting around late May. This will also justify the ongoing trend in the decline in risk premiums.

The global economy continues to remain on the post-Lehman shock recovery path. U.S. payrolls have not been improving in a consistent manner, but there is nothing yet to raise concern. Market volatility could increase as the Federal Reserve moves to normalize its monetary policy, but the normalization will be positive for the market in the long term. Geopolitical risk remains in Europe, but the ECB's monetary effort is expected to contribute to the economic recovery of the region. Global investors are expected to continue directing their assets into equities, which should be positive for Japanese stocks.