Rising Optimism Lifts Japan Stocks to 9-Month High

A report showing rising optimism among Japan’s major manufacturers sent the nation’s stocks soaring Wednesday even as government bond yields jumped.

Investors betting on a pickup in the economy drove the Nikkei-225 share index up 313.75 points, or 3.4%, to 9,592.24, the highest close since Sept. 19. The index has rallied 8.5% since June 16, a period in which many markets worldwide have stalled.

The potential for a turnaround also has been spurring more investors to dump low-paying Japanese government bonds, driving market yields higher. The yield on the benchmark 10-year bond ended at 0.91% on Wednesday, up from 0.87% on Tuesday and 0.74% on Friday.

The Bank of Japan’s “tankan” survey for the April-June period found that managers in the world’s second-largest economy are turning more optimistic, or at least less pessimistic. Large companies said they plan to boost capital expenditures by an average of 4.9% this fiscal year.

The survey showed that a key business condition index for large manufacturers improved to minus-five from minus-10 in the first quarter. The index measures the percentage of companies saying business conditions are better minus the percentage saying things are worse. It has been negative since March 2001.

“The economy is getting better,” said Naoshi Sato, who oversees $23 billion as chief investment officer at Yasuda Capital Management Co. in Tokyo. “Stocks are getting more attractive than bonds.”

The turnaround in sentiment has caused a whiplash in interest rates. The 10-year bond yield hit a record low of 0.45% on June 12.

At midday today in Tokyo, the sell-off in bonds was continuing: The yield on the 10-year bond rose above 1%. Stocks moved higher again, with the Nikkei up 1% to 9,685.46.

But in an economy that has largely struggled for 13 years, fears remain high that any improvement could amount to another false start. The same goes for the stock market.

A government spokesman warned against overconfidence. “The figure itself is not significant, to be honest, “ chief cabinet secretary Yasuo Fukuda said of the tankan index.

Takeshi Minami, senior economist at UFJ Tsubasa Securities Co. in Tokyo, said the tankan survey merely shows a better “mind-set” and doesn’t necessarily reflect an actual upturn in economic reality. “The economic situation is now at a crossroads,” he said, adding that chances for sustained profit growth at Japanese firms remain tough as deflation continues to plague the economy.

Still, other data also have been upbeat recently. Industrial production had its biggest gain in a year in May.

In the stock market, Japanese individual and institutional investors had been net sellers of shares in the second quarter even as the Nikkei rose 14%. Much of the recent buying has come from abroad, but some analysts say Japanese investors are getting interested again.

“We’re beginning to see domestic investors becoming more optimistic,” said Minoru Tada, a director at World Nichiei Securities Co.

The Nikkei index is up 11.8% this year, lagging behind the 13% rise in the U.S. Standard & Poor’s 500 index. The Nikkei is down 49% since the end of 1999, worse than the 32.3% drop in the S&P; 500 in the same period.

On Wednesday, bank shares were among the market’s biggest winners. Mizuho, Japan’s largest lender by assets, surged 18%; UFJ Holdings Inc., the fourth-largest bank, climbed 15%. Shares of both companies have more than doubled since the Nikkei slumped to a 20-year low two months ago.

“For banks, the higher the Nikkei goes, the better their balance sheets look” as their equity investments rebound, said Marc Desmidt, who helps manage $8.4 billion as head of investment at Merrill Lynch Investment Managers Co. in Tokyo.

U.S.-traded shares of major Japanese companies rallied in tandem with their Tokyo-listed shares. On the New York Stock Exchange, Sony jumped $2.18 to $31.41, Hitachi gained $3.30 to $48.75 and NTT Docomo rose $2.05 to $24.05.