By Ayai Tomisawa
TOKYO (Reuters) - Japanese stocks are expected to claw their way back close to a 26-year high by end-December, up over 5 percent in 2018, but could be held back by likely prospects of a stronger yen, a Reuters poll of market strategists and fund managers found on Wednesday.
Respondents in the latest Reuters poll were mostly optimistic about further gains into this year and next, also based on a buoyant outlook for the global economy as well as the longest run of domestic growth in nearly 30 years.
However, the gains will likely be limited as companies are expected to forecast weaker profits for the next year due to a stronger yen.
The Nikkei share average (N225) is expected to trade at 24,000 at year-end, up over 7 percent from Tuesday's close of 22,389.86, according to the median forecast from 19 analysts and fund managers polled by Reuters in the past week.
The Nikkei is down around 8 percent from its 26-year high hit on Jan. 23. That followed a Wall Street rout, based in part on inflation worries that have boosted yields on the benchmark U.S. 10-year note (US10YT=RR) to a four-year high.
But the Nikkei has regained momentum along with U.S. stocks.
"We know that high volatility and high yields do not mean an economic slowdown," said Fumio Matsumoto, a senior fund manager at Dalton Capital Japan, one of the more bullish respondents in the poll, forecasting the Nikkei to reach 25,000 at year-end.
He added that growth and low-volatility stocks, which have outperformed the broader market in the past, will likely make a turnaround. He said value shares like banks and exporters are likely to be bid up from now on.
For its part, the U.S. Federal Reserve, looking past the recent stock market sell-off and inflation concerns, expects economic growth to remain steady and sees no serious risks on the horizon that might pause its planned pace of rate hikes.
"From now to June, we expect U.S. companies to post strong profits thanks to a big tax cut, and shares will likely be strong on the prospect that U.S. rate hikes won't be (delivered) more than three times" this year, said Akio Yoshino, chief economist at Amundi Japan.
Forecasts for end-2018 ranged from 20,000 to 28,000. They were 22,000 to 25,000 for mid-2018. In the previous poll conducted in October, forecasts were 16,500 to 23,000 for mid-2018, and 14,500-26,000 for end-December 2018.
STRONGER YEN BITES
A recent Reuters poll showed most analysts predict the Bank of Japan will keep a key part of its super-easy monetary policy -- the long-term bond yield target -- at zero percent throughout the year, despite strength in Japan's economy.
Japanese yields would normally move upwards as well, but the BOJ stops that from happening, leading to a widening gap between the United States and Japan.
The interest rate difference created greater downward pressure on the yen last year, but analysts say that is over and it will be the dollar instead that will be nudged downward.
"The U.S.'s twin deficits are to blame," said Norihiro Fujito, a senior investment strategist at Mitsubishi UFJ Morgan Stanley (NYSE:MS) Securities, referring to the United States' huge and growing budget deficit, as well as the current account deficit.
In a separate Reuters poll, more than half the economists said 110-114 yen to the dollar was the optimal exchange rate for Japan's export-dependent economy. Recently, the yen has strengthened sharply to around 105.50 yen, hurting exporters' profits.
Fujito said that with the dollar trading at around 106 yen
"Earnings for the next fiscal year will likely be break-even or they may just eke out small gains on the year," Fujito said.
Analysts also said volatility still remains a focus point in U.S. shares. Asked about which asset classes would be the most vulnerable if U.S. stocks move sharply, answers ranged from emerging-market shares and bonds, developed market stocks and currencies as well as high-yielding products.
"We've seen that Japanese stocks which have high liquidity got hit a lot as well as the yen in the wake of U.S. stock market's rout," said Takashi Ito, an equity market strategist at Nomura Securities.
(This story corrects Nomura analyst's name in last paragraph)
(To read other stories from the Reuters global stock markets poll:)
(Additional polling by in BENGALURU; Editing by Ross Finley and Subhranshu Sahu)