U.S. stock indexes remain stuck in range this year. While stocks may still grind higher if the monetary policy stays ultra-accommodative and the economic growth picks up, many have started worrying whether their valuations look stretched now considering prospects for earnings growth.
 
Some investors have started looking for better opportunities in international markets. ETFs focused on Europe and Japan in particular, have seen impressive inflows this year. Stock markets in these regions are expected to continue to benefit from their central banks’ largesse.  
 
After a lackluster performance last year, Japanese stocks have been on the rise this year and there are many reasons why they could see further gains in the coming months.
 
Nikkei Marches to New Highs; Yen Stuck in a Range
 
Japan is primarily an export oriented economy and thus its stock market usually displays a negative correlation with the yen. A weaker currency makes Japanese exports more competitive and thus as the dollar strengthens against the yen, stocks of Japanese exporters go up. But the inverse relationship seems to have broken this year.
 
While the yen has been stuck in a tight range, almost unchanged versus the U.S. dollar year-to-date, Japanese stocks have been marching higher. The Nikkei index touched 20,000 on April 23, after more than 15 years. It’s up more than 12% this year.
 
One of the reasons for the surge is the prospect of additional stock purchases by the massive Japanese pension fund. During the fourth quarter of 2014, the pension fund was the largest buyer of Japanese stocks. And it’s not just the pension fund, the Japanese postal bank and even the central bank are buying stocks, and these purchases are expected to continue, boosting share prices.
 
The yen seems to be in a waiting mode as of now, but launch of additional easing in Japan or signs of a lift-off of rates in the U.S. would definitely weaken the currency, benefiting exporters in turn.
 
More Easing on the Cards?

Authorities in Japan continue to struggle to revive the economy. With launch of massive easing program about two years back, Japanese stocks had surged and the currency tumbled. But the economy slipped into recession after the sales tax hike last year. As a result, the government had to postpone the second tax hike. Though the economy emerged from recession, the growth continues to be sluggish.