Nikkei 225: Summer Trading Range    

• Abysmal unemployment numbers in the US have investors wondering whether stock prices have been trying to discount more recovery than the US economy is capable of at this point. Yet the Barron's investor confidence indicator is mirroring what we are seeing in the VIX volatility indicator, which has plunged back below 30, but is still well above the 10~20 trading range seen in the "go-go" housing boom.
• With the economic numbers giving no indication that the economy is about to surprise on the upside, we foresee basically a trading range in global equities through summer into the fall for the S&P 500 and Japan's Nikkei 225.   
• Given the turning in Japan's leading indicators, some global equity strategists are suggesting Japan is now a tactical buy because relative performance to other markets usually picks up four months after a turn in the leading indicators. 
• But we have difficulty expecting this to result in a stampede into Japanese stocks. The OECD actually downgraded its view of Japan in its latest forecast, and the minus 6%-plus number is significantly higher than the minus 3.0%~3.7% foreseen by the BOJ's policy board.
• Japan's economy is being weighed down by a combination of serious cyclical and structural problems. Recent estimates of the potential growth rate of Japan's economy has further deteriorated to 0.9% according to Cabinet Office estimates, and to 1.0% according to BOJ estimates making Japan's growth potential the lowest among developed nations, and a far cry from the 5%~7% of its BRICs neighbors. 
• Thus growth investors are bypassing Japan and looking increasingly to BRICs and other emerging markets, as the combined market cap of non-Japan Asian stock markets is now more than 25% of global market capitalization and rivaling that that of the European (including Africa and Middle East) markets. Japan's stock market is now just a little over 8%.
• On the other hand, value investors using return on invested capital (ROIC) as their yardstick will find there are still many bargains available in Japan. Domestic pensions like the Pension Fund Association are also increasingly examining ROIC.

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