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Tokyo: Nikkei jumps to near 26-year high as strong earnings expectations attract foreigners

[TOKYO] Japan's Nikkei index jumped to a near 26-year-high on Tuesday, as foreign investors piled in on expectations of strong earnings from Japan Inc, while Wall Street's strength underpinned sentiment.

The Nikkei share average opened lower but later soared and closed 1.7 per cent higher at 22,937.60, the highest closing level since January 1992.

US stocks climbed to record highs overnight, helped by earnings optimism and merger activity.

"We tend to compare the current market's strength with that of 1992. But the current rally in Japanese stocks is fuelled by real profits and that's different from 26 years ago when companies struggled to be profitable after the real estate bubble burst," said Takashi Ito, equity market strategist at Nomura Securities.

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Mr Ito said that Japanese stocks are currently trading at 14-times their projected earnings, compared with a much more aggressive valuation of 37.73-times their projected earnings in 1992.

Nomura analysts in September had expected that Japan Inc. firms would report a 16.3 per cent rise in their pretax profits for the year ending March 2018. Those projections have now been lifted to a 17 per cent rise, Ito said.

"The longer we wait, the higher profits we can expect," Ito said.

Also helping the rally was strength in Wall Street.

"US stocks are supported by strong fundamentals, which are also lifting foreign investors' risk appetite," said Norihiro Fujito, a senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities. "Foreign investors who were underweight on Japanese stocks in the summer are raising their investment stances to neutral and even overweight for a few reasons."

He said that foreign investors are attracted to Japanese companies' strong earnings prospects and Japan's political stability, which he describes as rare at present among developed economies.

Japan's Shinzo Abe was re-elected prime minister last week after his Liberal Democratic Party-led coalition retained its two-thirds "super majority" in the parliament's lower house.

According to Japan Exchange Group, foreign investors have bought a total of about 4.4 trillion yen (S$52.64 billion) in Japanese stocks and futures over the past six weeks.

Traders said factory automation equipment makers such as Fanuc Corp and Keyence Corp have been snapped up on expectations of strong earnings, soaring 3.1 per cent and 4.0 per cent, respectively.

Inpex Corp surged 3.7 per cent and Japan Petroleum Exploration Co jumped 6.0 per cent as oil prices held on to gains after hitting the highest since early July 2015 on Monday.

Realtor Mitsubishi Estate Co jumped 3.9 per cent after the company raised its net profit outlook to 112 billion yen from 108 billion yen for the fiscal year ending March 2018, thanks to strong building management business and other operations. It lifted other realtor stocks, with Mitsui Fudosan gaining 2.2 per cent.

Listed brokerage firms also gained, with Nomura Holdings surging 3.6 per cent and Daiwa Securities advancing 1.8 per cent.

The broader Topix rose 1.2 per cent to 1,813.29.