Nikkei rally flies in face of negative factors

The Nikkei average on the Tokyo Stock Exchange is showing signs of recovery.

Although the average temporarily fell to almost 10,000 amid troubles both at home and abroad, it has gradually rallied as businesses appear to be showing unexpected signs of steady recovery, which may primarily be due to hot money fleeing the U.S. and being used to buy up Japanese shares.

The key contributors to the rise, however, are public pension fund managers that have begun purchasing shares in earnest. They were totally inactive during the decline, but their buy orders that came after a long interval are believed to have lured many investors back.

But this is just a scenario in which share prices are soaring in a vacuum where transactions do not involve cash for selling and buying.

Conditions surrounding the market over the period had not changed. Although domestic fundamentals have bottomed out, equipment investment, consumer spending and income remain in a slump.

Businesspeople now doubt whether policymakers can improve the situation.

Abroad, the future prospects of the U.S. economy, which Japan and other countries turn to for prosperity, are uncertain. Few experts now predict the U.S. economy will show a so-called V-shaped recovery this year.

What is worse, the United States is seeing capital flight due to its "twin deficits," fears over fresh terrorist attacks and accounting scandals, which have caused the dollar's depreciation.

This has been hard on Japan, which is relying on the U.S. for its own recovery.

Given these circumstances, the investment environment hardly looks favorable for active buying. If the Nikkei hits 11,000, many investors may be tempted to sell the shares they purchased at the end of March, and thus it is unlikely the index will exceed the 12,000 level in the near future.

Nonetheless, the April-June rise may be discussed from both the macroeconomic and microeconomic view, with both perspectives providing criteria for buying or selling.

Although the yen's rise may keep investors from aggressively buying export-related shares, domestic demand-related shares of firms performing favorably are expected to continue to be selected for investment.