Japanese equities are quite undervalued. Japanese sectors continue to dominate the world's cheapest quartile of sectors. Trading at a PB of 1, an ROE of 8% and a JGB yield of around 1%, the gap between ROEs and debt costs is a high 7%, larger than that in ex-Japan Asia, which trades at 1.8 PB. At 13.5x 2012E earnings, the PE is slightly higher than the global PE multiple of 12.2x. Sentiment in Japan is still subdued, despite the recent market rally and BoJ inflation targeting monetary ease. The technicals have gone from really bad last October to quite resilient now. The question we are asking is – are technicals contrary indicators or confirming indicators in an environment of frequent recession? Perhaps the latter in Japan? Japanese policy indicators are at expansionary settings, especially given the recent weakness in the Yen, and monetary easing by the BoJ. The sales tax, if it happens, is still a long way off in 2014. IPOs are moribund. The correlation between the long bond yield and the Nikkei-225 is intact. As MOMLI (the mother of leading indicators) curls up decisively, the expectation of stronger nominal global economic growth has revived the Japanese equity market. Value remains a long-term winner.

Eoin Treacy's view It has long been our view that a weaker Yen was a required catalyst to stir investor interest in Japan's stock market. Following a number of half-hearted attempts to defend the ¥76 area, the high profile exodus of manufacturers appears to have galvinised Bank of Japan attitudes towards the currency. The adoption of an inflation target reflects a more serious attempt to improve competitiveness through currency weakness. The US Dollar paused below ¥82 for two weeks but broke upwards today and a sustained move below ¥78.5 would be required to question potential for additional upside.

The Price / Book for the Nikkei 225 ranged between 2 and 3 between 1992 and 2006. It has been ranging around 1 since 2009. When compared with the Nikkei's price chart over the same timeframe, with prices recently having tested the 2003 lows, a significant valuation contraction is evident The Index has rallied from just above 8000 in late November to test the psychological 10000 today. 9500 now represents the most recent higher reaction low and a sustained move below it would be required to question the consistency of the short-term uptrend.

An important factor, which has been largely absent since 2004, has been the outperformance of the banking sector. The relative chart remains in a consistent uptrend and in absolute terms the sector continues to extend its recovery. (Also see Comment of the Day on March 1st) .

I last reviewed Japanese relative strength leaders in Comment of the Day on February 9th and thought it would be interesting to revisit the sector one month on. I performed the same High/Low Filter of the Topix, but this time instead of finding 93 companies hitting at least new 12-month highs in the last five days I found 322. The banking sector is well represented in the new list.

In the automotive sector, Isuzu Motors continues to extend the breakout from a yearlong range. Hino Motors, Autobacs Seven and Press Kogyo share a similar pattern. Mitsuba Corp broke upwards this week. Kyokuto Kaihatsu continues to extend its explosive breakout and is becoming increasingly susceptible to a reversion toward the 200-day MA. Unipres Corp continues to hold a progression of higher reaction lows and most recently found support in the region of the 200-day MA. A sustained move below ¥2100 would be required to question medium-term scope for additional upside.

In the wholesale Distribution/Wholesale sector Emori & Co Ltd, Spk Corp, Kagome, Yamazan, Maruka Machinery and Meiwa Corp all continue to extend breakouts from their respective ranges. Nakayamafuku hit a new 5-year high this week.

In the consumer sector, Pan Asian Dividend Aristocrats Uni-Charm (0.77%) and Japan Tobacco (1.99%) also continue to extend their respective breakouts. Chiyoda Co. (3.26%) exhibits a saucering characteristic and progression of higher reaction lows since late 2010. A sustained move below ¥1400 would be required to begin to check medium-term upside potential. Nikon Corp is also extending its breakout. In the pharmaceuticals sector, Astellas Pharma broke out of its base this week, to post a new almost two-year high.

The above shares represent some of the relative strength leaders in the Japanese market. The fact that an increasing number of shares are completing lengthy consolidations, the banking sector is outperforming and the market is being supported by a weaker currency all point toward increased investor appetite and improving perceptions of recovery potential.