Bank stocks are key to recovery of the Japanese equity market

US and European equity indices reached new highs for 2009 throughout October, yet the Topix is moving at a level far below the high of 987.27 it posted on 31 August. What will it take for Japanese equity to catch up?

The main reason for Japanese equity lagging behind other markets is the sluggish financial sector centring on banks. A rise in bank stocks will be essential for recovery of overall Japanese equities, yet the market continues to be bearish on banks. However, comparing stock price levels, I see signs of overselling in the bank sector, and subsequent prospects for recovery of Japanese equities. The first sign is the Topix/S&P 500 Ratio. This ratio dropped to 0.819 in October, a new 10-year low. This means it is at levels even lower than April 2003 when Japan was suffering most from the afte...