Tokyo market: Overheating worries set to hit prices

JAPAN'S benchmark Nikkei stock index is expected to fall this week as investors worry that the market has started to overheat after a six-day, 6 per cent rally.

The Nikkei 225 index closed on Friday at a five-week high of 17,198.55 after January-March GDP figures released on Thursday smashed expectations and marked the end of more than a year of contraction in the world's second- largest economy.

"Everybody failed to recognise the signs," said Masaaki Higashida, a deputy general manager at Nomura Securities. "Share prices basically got a boost from that oversight, and they'll have to undergo a bit of correction this week."

Steel makers and other struggling domestic industries that were bid up in the week just ended may give up some of their gains as investors bet the rally has run too far. The Topix iron and steel sub-index soared 9 per cent in the last six days, outpacing both major indexes.

Exporters remain vulnerable to concern that US monetary authorities will raise interest rates to rein-in inflation in the world's biggest economy. Such a move is likely to discourage US consumers and investors, dealing a double blow to foreign favourites like Sony and Honda.

However, not everyone thinks the Tokyo market will fall. "The next sound you hear should be the noise of money being sucked out of dollars and Wall Street and flooding into yen and [Tokyo's stock market district] Kabutocho," said Scott McGlashlan, of Perpetual. Japanese bonds are likely to be little changed as investors assess the central bank's interest rate policy at its board meeting tomorrow and in the governor's speech on Wednesday.

The faster than expected economic growth that boosted stocks casts doubt on how long the Bank of Japan can keep the overnight lending rate between banks close to zero. That damped demand last week for four-year and six- year bonds.

"While few actually believe such talk, it is equally clear that rates will not be staying at zero per cent in perpetuity," said Stuart Trow, manager of market analysis for Norinchukin International.

Higher lending rates between banks will make it less profitable for investors to raise funds in the money market to buy bonds. The cheap cost of borrowed funds since February fuelled a four-month rally. Bonds maturing in four to seven years, less vulnerable in the event of extra government debt sales, had been favoured.