Japanese bull rages on

(MENAFN- Khaleej Times) Last week was a roller-coaster and the NIKKEI Dow closed at 19,800. Abenomics has had a seismic impact on Japan's economy, financial markets and banking system. The yen has fallen from 76 on the eve of the election in 2012 to 122 against the US dollar. Corporate profits have exploded. Land price rises, job growth, bonuses, capex and consumer spending have lifted Japan from the spectral legacy of the two deflation-haunted lost decades. The Trans Pacific Partnership, or TPP, will be Japan's Nafta and arguably the most important trade pact in Asian history.

The fiscal and monetary arrows of Abenomics were both huge successes. The third arrow (structural reform) will now provide the ballast for Japan Inc profits and Marunouchi, notably the Corporate Governance Code, labour reform, tax cuts and the government procurement/intellectual property changes mandated by the TPP. The privatisation of the post office, the 150 per cent rise in the Nikkei Dow since 2012 and the Government Pension Fund's (the world's largest institutional investor) rise in equities allocation. Abenomics and the IPP will even reform Japan's notoriously protectionist farmer and retail distributor lobbies in the LDP.

Corporate margins and returns on equity in Japan have begun to expand as companies embrace the concepts of shareholder value, alien even five years ago. This, prima facie, is an argument for a valuation rerating in the Japanese stock market. If the Fukushima tragedy and the Chinese riots in 2011 had traumatised Japan, Abenomics has led to a new pro-growth, pro-reform, pro-international trade political consensus, goosed by the "wealth effect" of tax cuts and higher share/property prices. The LDP has now given Japan its most successful post-war prime minister, whose legacy will be greater than those of Nakasone, Koizumi's or even Nobusuke Kishi, Abe-san's grandfather and admittedly a member of General Hideki Tojo's wartime cabinet when Imperial Japan overran Manchuria, attacked Pearl Harbour and vanquished the British, French and Dutch colonial empires in Southeast Asia.

Japanese equities trade at 15.6 times forward earnings on the Nikkei Dow. This does not surprise me since returns on equity have doubled from four to eight per cent in the era of Abenomics. Unlike Europe or the US, Japan can credibly deliver 15-17 per cent EPS growth in the next 12 months. While the dividend yield of the S&P 500 index is below the yield of Uncle Sam's 10-year US Treasury note, the Nikkei Dow's dividend yield is 1.70 per cent or four times of the yield on the 10-year Japanese government bond.

I have made no secret about my strategic bullishness on Japanese megabanks Sumitomo Mitsui, Mitsubishi UFJ and Mizuho in 2015. This was a highly-successful strategy call as the shares of the Japanese megabanks have risen 25-30 per cent since the publication of my recommendation.

There are two global factors that could cause a near term correction in Japan's bull market. One, China/Greece could cause global growth estimates to sag and hit export growth for Japan Inc. Two, carnage in global financial market could trigger safe-haven flows in the Japanese yen, as happened during the post-Lehman global banking crisis. These two scenarios will hit Japanese corporate profits and stock market performance. After all, Japanese equities lost 22 per cent during the Bernanke Fed's "taper tantrum" in June 2013.

Not even the most diehard Dia Nippon sceptic can deny that the Nikkei Dow and Topix have been in a secular bull market since Abe's election as prime minister in 2012. Yet the Japanese stock market has risen 40 per cent since early 2014 and more than 150 per cent since I first recommended yen-hedged Nikkei Dow positions in November 2012.

Abenomics lifted the Nikkei Dow from 8,000 to 20,800, a level last seen in 1996. The easy money in the Japanese bull market has been made but Abenomics, the GPIF, the promise of TPP capital flows and the "equity culture" all suggest that a "buy on dips" strategy is optimal.

Apart from soft Japanese exports and "endaka" (strong yen), the existence of cross-shareholdings and Diet opposition to Abe-san's national security policy are sources of domestic risk to the stock market. Earnings guidance could also be more pessimistic by risk-averse CEOs as the Chinese economy unravels. Yet a stronger US economy could prove, as in the past, the economic locomotive for Japan Inc. Net net, I expect the Nikkei Dow to trade in a 17,600-22,000 range in 2015-16.