Excess Liquidity versus Fundamentals-Driven Rallies   

• Sentiment regarding Japanese equities continues to improve. Industrial output rising 5.2% mo-mo in April was a positive surprise, and Japan's government and central bank both raised their overall economic assessments in May for the first time since 2006, encouraged by signs of a bottoming out of exports and industrial output. The Diet also passed a supplementary budget, worth JPY13.9 trillion of fiscal expenditures, that is one of Japan's largest ever, which economists expect will boost Japan's GDP by 0.8~2.0 percentage points.  The remaining JPY800 billion of the package, related tax breaks, awaits the needed tax legislation.
• Normally, markets usually see an interim correction before shifting gears from an excess liquidity-driven phase to a fundamentals-driven phase, but the liquidity-driven phase continues to be more resilient than expected.
• But with positive domestic news and a lack of any particularly bearish overseas news, the Nikkei 225 has recovered to 9,500 for the first time in seven months, or 50% of the 5,005 or so points the market lost in crashing from the 12,000 mark to an October 2008 low of 6,994.90 as the global financial crisis erupted. The solid close on Friday has the Nikkei 225 just peeking above its still-declining 200-day moving average of 9,331.4, indicating the market remains on track for a recovery to the 12,000 mark on the Nikkei 225. 
• The market cap-weighted Topix is still trading between its 50-day and 200-day moving averages, while the oil, non-ferrous metals, transportation equipment and metal products subsectors have already seen a golden cross between their respective 50-day and 200-day MAs. In addition, golden crosses are rapidly approaching in the construction, chemicals, glass/ceramics and machinery subsectors.
• In other words, the rally continues to broaden while daily trading volume continues to trend between 2 and 3 billion shares, even though the supply-demand picture by investor type remains mixed. Foreign investors have been net buyers in three of the past five weeks, with individual investors, investment trusts and corporate buy-backs taking up the slack when foreigners are selling.

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