Japan's 15 Minutes of Fame     

• The economic news continues to support more fund flows into risk trades. While long-bond yields (10 Year Treasuries) have essentially doubled from 2008 lows, they are still over 100bps away from �gnormal�h levels seen prior to the 2008 financial crisis. Further, history (i.e., five periods of rising fed funds rates since the 1980s) that stock prices consistently rise during periods when the Fed is raising the Fed Funds rate, as the yield curve tends to flatten during such periods. This is because market prices of long bond yields lead in discounting economic recoveries, and it is central bankers (the Fed) who play catch-up in such periods.
• Rather than being overbought, the USD index is only now back in a trading range seen 75~100 trading range seen between 1987 and 2008, while we see further downside risk in both the Euro and JPY trade-weighted indices. If one is looking for alpha in the currencies, we would look at the Canadian and Australian dollar, i.e., the resource or the high growth Asia currencies.
• The weak yen movement is expected to remain supportive of Japanese equities. Japanese equities, smaller cap companies in particular, have now been outperforming their developed and even emerging market peers for the past three months?i.e., Japan is finally seeing its 15 minutes of fame. With a continuation of the export-led recovery, the Nikkei 225 could even see 15,000 before the end of 2010, which represents 30%+ upside potential.
• As explained last week, investor attention is now shifting to capital expenditure-related sectors and names, while interest is even returning to the long-suffering J-REITs. Over the past month, the leading Topix subsectors have been steel (+12.8%), shipping (+10.8%) and other manufacturing (+10.1%). The steel sector is seeing renewed interest supply conditions are likely to remain tight in Asia for high-quality steel. In other manufacturing, Nintendo (7974) has come roaring back from a 2009 selloff as heavily invested foreign investors reducing their holdings because of slowing growth and the strong yen, while shipping stocks have been rebounding on better than expected profits. Led by economic growth in China and India, world trade is projected by the World Trade Organization to expand by 9.5% this year after shrinking by 12.2% last year.

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