Feb 22 (Reuters) - Japan's Nikkei share average hit a record high on Thursday, surpassing its 1989 peak after a year-long rally driven by cheap valuations, corporate reforms and investment flows diverted from a battered Chinese stock market.
Here's what analysts and investors say:
TONY SYCAMORE, MARKET ANALYST, IG, SYDNEY
"The Nikkei has forged its way into blue-sky territory and appears increasingly comfortable with the idea that BOJ policy normalisation is imminent, which reduces the chance of a potential correction from that direction.
"I expect the 40,000 level to become the market's next objective for the Nikkei. If momentum names really start to get involved and add to positioning on the break of the 1989 high, we could see a blow-off type move in the short term towards 42,000."
RICHARD KAYE, PORTFOLIO MANAGER, COMGEST, TOKYO
"The big constituents of the Nikkei are in a strong situation - Fast Retailing establishing its brand in Asia, Tokyo Electron ahead of a major upswing in semiconductor spending, Advantest winning share in Nvidia chip testing, KDDI benefiting from a rationalisation of mobile tariffs and an expansion of its business, Toyota winning share thanks to its hybrid strategy. And, it is very unusual that such favourable circumstances for all these Nikkei constituents coincide.
"Japan has two major differences with every other market: its currency is at a multi-decade low and widely assumed to be an asymmetrical bet as soon as the yield gap with the U.S. narrows, and its domestic investor base includes some of the world's largest investors like Japan Post Bank but has been dramatically underweight its own market for 30 years.
"I think both of those factors... could power the Nikkei beyond what valuation and earnings analysis alone might suggest."
KYLE RODDA, SENIOR MARKETS ANALYST, CAPITAL.COM, MELBOURNE
"It's been an almost perfect mix of factors pushing Japanese equities to record levels. The Nikkei has been the quintessential soft-landing trade, requiring a resilient global economy and subsequent lower yen, along with a softening global inflation pulse and subdued volatility in rates markets to push higher.
"40,000 is what everyone will be looking at next. When you break all-time highs, it's typically clear air from there, and the next big levels are the psychological ones. Again, a lot has to go right, but 40,000 will be the next milestone."
ILAN FURMAN, CHIEF INVESTMENT OFFICER, BRIDGEWISE, LONDON
"The rally in the Nikkei index has been partly attributed to flows diverted from China, amid investors' concerns around China's faltering economy and stock market crush."
"The performance of Japanese equities is quite diversified across sectors, suggesting that investors are not focused on China proxy names or sectors, but actually looking to diversify away."
SHOKI OMORI, CHIEF JAPAN DESK STRATEGIST, MIZUHO SECURITIES, TOKYO
"The Nikkei will continue to rally, with foreign investors expecting domestic investors to support Japanese equities via the new NISA programme. The premium that Japanese stocks offer and aggressive 'animal spirit' buying will push Japanese equities up. On top of that, the more Chinese data comes out weak, the more Asian money will flow into the Nikkei.
"The Nikkei could hit 40,000 anytime soon. If the BOJ keeps policy unchanged in March, it would rally until month-end. Some profit-taking will likely be seen into the fiscal year-end (at end-March), but overall the trend for Japanese equities is upwards."
DAN HURLEY, PORTFOLIO SPECIALIST FOR JAPANESE AND EM EQUITIES, T. ROWE PRICE, LONDON
"The market drivers are very different to those compared to 1989-90; back in the late 80s, the rally was driven by very high land prices and great exuberance in terms of investors overseas and domestically – Japan was 45% of MSCI world, today it is just 6%.
"Back in 1989, the Nikkei traded on an incredible 61x P/E (price to earnings), today it is just 15x P/E, broadly in line with the long-term average of 14x. The price-to-book ratio (P/B) was 5.6x in 1989, today it is 1.4x. No signs of a bubble today."
ANDREW SHEETS, GLOBAL HEAD OF CORPORATE CREDIT RESEARCH, MORGAN STANLEY, LONDON
"We don't think positions on Japanese shares are overcrowded. The next challenge is that so far, the equity strength has coincided with a weak currency. That will be the next test, can the market stand on its own two feet if the currency moves sideways?
"There are scenarios where the yen strengthens modestly and that's good for some sectors. We have a favourable outlook for Japan stocks."
BRUCE KIRK, CHIEF JAPAN EQUITY STRATEGIST, GOLDMAN SACHS, TOKYO
"It's just an arbitrary number based on a price-weighted index, but still an important psychological barrier to get through for Japanese investors.
"What it does show is just how much of an impact a clearly articulated top-down strategy to boost corporate value can have when it is supported by bottom-up buy-in from foreign and domestic investors.
"When the TSE re-started its corporate governance focus in late January last year, the Nikkei was more than 40% away from these all-time highs and there was a lot of scepticism about its chances of success. For the TSE to have improved investor perceptions about Japan this much in such a short period of time is absolutely remarkable."
(Reporting by Reuters reporters; Compiled and edited by Ankur Banerjee and Subhranshu Sahu)
