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Japan's Nikkei stock index is set for modest gains next year as steady earnings growth, expectations for more monetary stimulus and the US economic recovery will likely offset a slowdown in China, a Reuters poll found. The Nikkei benchmark is expected to rise to 21,500 by the end of 2016, according to the median forecast of over 30 analysts polled by Reuters in the past week, up nearly 12 percent from Friday's close of 19,230.48.
In mid-2016, the Nikkei is seen trading at 20,900. But the forecasts for the end of 2016 were spread across a wide range, suggesting market uncertainty. Having gained around 10 percent so far this year, analysts expect the benchmark to end 2015 at 20,000, around 5 percent lower than this year's high of 20,952.71 achieved in June, the highest level since 1996.
Analysts were cautiously optimistic about the market's performance, expecting higher corporate profits for the fiscal years ending March 2016 and 2017. Expectations for companies to boost shareholder returns via higher dividends and share buybacks are also set to underpin the Nikkei. Another positive catalyst for the market may come from a renewed push by Prime Minister Shinzo Abe to improve Japan's flagging economy ahead of an upper house election next summer, they said.
A majority of economists in a separate Reuters poll expect more stimulus from the Bank of Japan in the first half of next year. "Steady corporate earnings and the central bank's exchange-traded funds buying will likely support the market," said Isao Kubo, strategist at Nissay Asset Management. "The impact of the weak yen on earnings will be smaller than this year, but we still expect about a 10 percent rise in profits next fiscal year."
Kubo predicts the Nikkei will trade at 23,000 at the end of next year. A steady recovery in the US economy will support Japan, as will an expected interest rate increase by the Federal Reserve at this week's meeting, which will help boost dollar-yen rates to the benefit of Japanese exporters, analysts said. Risks include potential ripple effects from tumbling oil prices after the Organization of the Petroleum Exporting Countries decided to keep production at near-record levels in an oversupplied market. That has spooked investors grappling with reduced demand from China, the world's biggest energy consumer. Global equities have been hit hard this month on China growth concerns, stoking uncertainty about the outlook for all asset markets. "The answer hinges on whether the global economy can withstand the potential further slowdown of the Chinese economy," said Michiro Naito, executive director of equity derivatives and quantitative strategies at J.P. Morgan.

Copyright Reuters, 2016

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