We should also mention that land prices seem to have bottomed and some areas are now witnessing increasing rather than decreasing property prices, another sign that the economy continues to recover slowly. Despite the fact that the Japanese population is now moving sideways to slightly lower we note that many of the major population centers are witnessing growth including greater Tokyo, Nagoya, Osaka, and Fukuoka.

The government has indicated that they will go ahead with the hike in the consumption tax from 5% to 8% which is scheduled to take place on 1st April next year. As we have mentioned in previous notes, we think the first quarter of the next fiscal year will be characterized by lower GDP growth but look for a good bounce back during the subsequent quarters of the fiscal year. An expected increase in government spending, possibly a lower corporate tax rate, and a continuation of the Bank of Japan’s easy money policy should help overcome the negative impact of the hike in the consumption tax. For the next fiscal year most economists are now suggesting GDP growth of 1-2% in real terms and continued expansion of corporate earnings.

We continue to stress that we think Japanese stock valuations are still reasonable to low but remind investors that stock picking will continue to be very important and throwing money into yesterday’s blue chips is probably not a very good long term strategy.

Eoin Treacy's view Following an explosive decline earlier this year, the Yen has been ranging in a process of mean reversion for nearly six months. It encountered resistance in the region of the 200-day MA again this week and a sustained move below ¥98 would be required to question US Dollar dominance.

The correlation between the USD/JPY and the Nikkei-225 highlights just how central the devaluation of the Yen is to the stock market’s performance. This also helps to depict how important a role international investors play in the demand component of the market.

At Fullermoney, we have long highlighted how effective the Topix 2nd Section index of small caps is as a lead indicator. The Index has been consolidating in the region of the April peak for the last few weeks and a sustained move below the 200-day MA would be required to question potential for additional upside.