As the Nikkei 225 Index tumbled 6.4 percent on Thursday to  12,445.38, Nomura has surprised the markets by raising its Nikkei Average forecasts from 16,000 to 18,000 by the end of December 2013.  The Japanese stock market is down 21.9 percent from its May 23 peak. It has sent Nikkei back into bear market territory, says Barbara Kollmeyer of MarketWatch.

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Nomura’s View On Nikkei

Nomura analyst Hiromichi Tamura said that markets have underestimated Abenomics and Japanese stocks are currently trading at a lower price/earnings ratio compared to their U.S. counterparts. Tamura said there is no reason to get bearish on Japanese stocks assuming Abenomics hasn’t failed.

Recommending a bullish stance, Nomura said that the full impact of Shinzo Abe’s stimulus efforts is yet to be seen on household income and capex. Analysts still see huge investment opportunities in these areas. Nomura believes that stocks will generate substantial earnings, and the equity market will benefit from the government’s growth strategies.

Japanese stocks have risen fairly consistently since the Abe government came into power, without undergoing a correction phase. But stocks plummeted sharply on May 23 after reaching a peak of 15,942.60. The equity and bond markets continue to witness high degree of volatility.

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BOJ to Take Additional Measures

Nomura expects the Bank of Japan to take additional measures as markets have diverged from their initial expectations. There is just a pause in the development of growth strategies. After the market participants’ disapproval, the Abe administration quickly responded by revealing its willingness to bring additional stimulus measures. That’s a positive sign. The July 21 Upper House elections are approaching. Once that’s over, the government looks set to pursue its strategies. That will further boost Japanese stocks.

However, Nomura hasn’t brushed off the recent turmoil in the stock market lightly. Nikkei is down approximately 10 percent in June so far, which constitutes a challenge to prime minister Abe’s stimulus measures. Hiromichi Tamura said that if the Nikkei 225 Index falls below where it was before the Bank of Japan launched its massive stimulus program (April 3, 12,362.20), markets may then call Abenomics a failure.

A big risk for Japan is the U.S. Federal Reserve trimming its stimulus program. That will trigger a major shift away from risky assets.