Foreign investors are likely to return to Japanese stocks as companies begin to lift their earnings forecasts this summer, and could help boost the TOPIX index as much as 18 percent by the end of this year, Morgan Stanley's Japan equity strategist said on Wednesday.
Even as market participants worry about recent selling by foreigners - a key driver behind last year's 40-percent gain in the Tokyo equity market - it is not time for overseas investors to write off Japan, Naoki Kamiyama told Reuters in an interview.
Recently the market has had some big scares ... investors have been worried about inflation, about interest rate increases, but earnings can overrule those fears, he said.
As companies begin to raise their forecasts in July, stocks' price-to-earnings ratios will begin to look more attractive to foreign investors, said Kamiyama.
Japan will look more appealing, relatively, compared to the United States and Europe and it will become easier for investors to go overweight again on Japan in terms of country selection, he said.
In particular, Japanese banks are likely to see upward earnings revisions as lenders continue to benefit from improvement in the world's second-largest economy, Kamiyana said.
Buying of such stocks could push the TOPIX as high as 1,800 before the end of this year, he said. The index finished on Wednesday at 1,527.51, down 1.41 percent on the day.
However, he said shares of Japanese exporters may not fare as well, citing the likelihood of a stronger yen.
As the U.S. Federal Reserve begins to wind down its cycle of interest rate rises, the Bank of Japan looks set to begin its own campaign of tightening rates.
That means the dollar is likely gradually to lose its yield advantage over the yen, eventually weighing on currency-sensitive stocks such as auto makers, he said.
Kamiyama was ranked third this year among equity strategists in an annual survey of fund managers conducted by the Nikkei Financial Daily.