December 12, 2012 / 6:51 AM / 5 years ago

Nikkei hits near 8-month closing high, signalling overbought

* Nikkei up 0.6 pct; Topix rises 0.7 pct
    * Nikkei in 'overbought' territory
    * Market shrugs off N.Korean missile launch

    By Dominic Lau
    TOKYO, Dec 12 (Reuters) - Japan's Nikkei average climbed to
its highest closing level in nearly eight months on Wednesday,
led by exporters as persistent speculation that a likely new
government would pressure the central bank to take bolder policy
weighed on the yen.
    The Nikkei advanced 0.6 percent to 9,581.46, taking
the index back to 'overbought' territory, with the 14-day
relative strength index at 70.9. Seventy or above is considered
overbought and often indicates a possible near-term pull back.
    The index has rallied 10.6 percent over the past month,
driven by a weaker yen after Shinzo Abe, the leader of the main
opposition party which is expected to win this Sunday's general
election, called for the Bank of Japan to adopt aggressive
monetary easing, including embarking on "unlimited easing".
    The central bank is also expected to expand its asset-buying
and lending programme next week. 
    Exporters have been the main beneficiary of the softer yen,
which was quoted at 82.655 yen to the dollar, not too far from a
7-1/2-month low of 82.84 yen touched on Nov. 22.
    "Coordinated fiscal and monetary policy in Japan would be,
should be and could be enough to give you a cyclical bull phase
that can last six to nine months ... We are bullish," a senior
trader at a foreign bank said, adding that the key was picking
the right stock.
    "Could we see profit-taking post election? Yes. But we are
not advising people to. December, January tend to be good months
for the Nikkei," he said.
    Exporters which led the charge higher on Wednesday included
TDK Corp, Canon Inc, Honda Motor Co 
and Toyota Motor Corp, up between 0.9 and 3.5 percent.
    The Japanese financial markets shrugged off the news that
North Korea had launched a long-range rocket, stepping up the
threat the impoverished state poses to the region.
    Panasonic Corp surged 7.2 percent after a source
said the consumer electronics maker may sell its Sanyo digital
camera business to Japanese private equity fund, Advantage
Partners, by the end of March. 
    The broader Topix index ended 0.7 percent higher at
791.29 in relatively active trade, with 1.94 billion shares
changing hands, up from Tuesday's 1.54 billion and last week's
average of 1.91 billion.
    Bank of America Merrill Lynch said it expected the Topix to
rise to 880 in the next 12 months in its base case scenario, and
under a bull case scenario, the index could reach 1,050, 32.7
percent above where it ended on Wednesday.
    "We forecast a rise to 1,050, as the emergence of a strong
government, expanded public spending, and the establishment of
an inflation target changes market expectations and lifts
domestic-demand sectors such as finance and construction in
addition to the exporters," Merrill Lynch said in a note.
    But some market participants said the market may see
correction after the election as hopes for easy monetary policy
are already priced in to the current market.
    "Investors who wasted no time chasing the market higher as
soon as the yen started weakening will likely unwind their
positions soon," said Makoto Kikuchi, the chief executive of
Myojo Asset Management. "They probably will just 'eat in
moderation', instead of trying to 'full their stomachs.'"
    Buoyed by the past month's rally, the Nikkei is up 13.3
percent this year, in line with a 13.5 percent gain in the U.S.
S&P 500 but trailing a 14.7 percent rise in the
pan-European STOXX Europe 600.
    To protect against any downside risk, BNP Paribas proposed
investors sell Nikkei calls with March 2013 expiry and buy puts
with the same maturity to take advantage of the flat volatility
    "Short-term upside could be limited, and some investors may
consider taking profit after the snap election on 16 December.
Indeed, there is time gap between the potential change in the
BOJ's governor and implementation of bold monetary easing, which
is an important agenda under Abe's leadership," the brokerage
said in a note.
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