* Abenomics to support Japan stocks amid U.S. tapering, China fears
* Japan stocks more expensive than Asian shares, however
By Ayai Tomisawa and Tomo Uetake
TOKYO, July 12 Japan's aggressive reflationary policies will help its share market fare better than Asian peers, weakened by concerns that China's growth is slowing and expectations that the U.S. Federal Reserve will begin winding down its massive stimulus programme.
Prime Minister Shinzo Abe's ruling Liberal Democratic Party is expected to consolidate its rule by winning the upper house election on July 21, allowing the market to stay focused on signs of an improving economy thanks in part to a weaker yen's support for big exporters like Toyota Motor Corp.
"The main focus in the global market will still be the U.S. economic recovery and the timing of the Fed's tapering, but if Abe does not disappoint, the Nikkei should be supported by the domestic economic recovery hopes," said Takatoshi Itoshima, chief portfolio manager at Commons Asset Management.
Dubbed "Abenomics", the prime minister's strategy of monetary expansion and fiscal stimulus has helped Tokyo's Nikkei post a 40 percent rise so far this year.
That compares with a 5 percent fall in Asian shares, as measured by the MSCI Asia-Pacific ex-Japan index.
Abe still has to deliver on promised structural reforms, that will be needed to put Japan's fiscal house in order, as the government is saddled with debt that is twice the country's annual output, and the largest in the industrial world.
Global investors are watching closely what Abe does, portfolio managers say.
"The next thing the market is focused on is whether the government is committed to bold structural reforms such as corporate tax reduction and major changes in the labour market including lifetime employment," said Yoichi Nagae, chief portfolio manager at Nissay Asset Management, which has more than $60 billion under management.
Looking at the economic data so far the strategy appears broadly on track. At a policy review on Thursday, the Bank of Japan said the economy was recovering, delivering its most optimistic view in 2-1/2 years.
Analysts have expected consumer spending would rise before Tokyo's plans to double the sales tax from current 5 perecnt in two stages - to 8 percent in April 2014 and 10 percent in October 2015. The government has said the plan will go through only if the economy is deemed strong enough to cope with the impact, however.
In terms of valuations, Japanese equities carry a 12-month forward price-to-earnings ratio of 14.2, more expensive than the MSCI Asian gauge's 11.
"It's long-term investors that are buying the Japanese stocks now," said Takashi Maruyama, head of equity fund management department at Nikko Asset Management Co Ltd, which has 15.3 trillion yen ($155 billion) under management as of March.
The export sector, along with real estate and financial companies, had helped carry the Nikkei to a 5-1/2 year high of 15,942.60 on May 23.
"We increased (holdings in) Toyota between December and February as we expect a weak yen to boost the company's earnings," said Shogo Maeda, head of Japanese equities at Schroder Investment Management. Maeda and his team manage about 700 billion yen.
Some analysts doubt whether exporters will continue to perform strongly, after they found early favour as the Nikkei rallied on the back of the yen weakness.
Nagae said if economic reforms came through, he would focus on domestic-demand stocks that have attractive valuations such as small internet firms.
"I would pick up those companies, but they are not covered by analysts so company details are not out there, so most investors will simply flock to the index futures," he said. "A premium will be added to the Nikkei then, and I would not be surprised if the index hits 20,000 next year."
Masayuki Kubota, senior fund manager at Daiwa SBI Investments, was more cautious, saying that the eventual roll back of the Fed's $85 billion a month stimulus would put pressure on emerging markets.
He expected the Nikkei's upside would be capped around 15,000 this year.
($1 = 98.7400 Japanese yen) (Editing by Dominic Lau and Simon Cameron-Moore)