A Nikkei survey of 13 domestic research institutes shows a growing concensus that Japan's economy rebounded in Q2 calendar 2009 by as much as 4.2% annualized.

These forecasts show exports rebounding 8.9% versus the 14.7% plunge in October-December 2008 and the 26% plunge in January-March. The other major contributor is expected to be the massive stimulus measures that went into effect in April, which should goose public works spending by 10.7% in the quarter. The biggest contributor to Japan's GDP, i.e., consumer spending, is seen to have risen 0.9% for the first rebound in three quarters.

Still depressed are capital spending, which is estimated to have fallen 5.1% as Japanese factories are plagued with severe excess capacity and a major supply-demand gap. Despite a record rebound in production in the quarter, absolute levels are still only 80% of those prevalent last fall. Housing investment is also weak, estimated to have fallen 9.5% or more than in the previous quarter.

The production recovery is expected to continue through Q3, but weak employment and wages will continue to hamper consumption, and capacity will remain excessive Summer bonuses at Japan's leading companies averaged 753,500 yen this year, down 17.15 percent from a year earlier, marking the largest year-on-year fall ever, while unemployment is at a 6-year high at 5.4%.

Aggregate Corporate Profits Back into the Black

On a pretax basis, a Nikkei survey of consolidated financials for 616 companies (accounting for 68% of market capitalization) indicates that Japan's listed companies swung back into the black to JPY978 trillion in Q2 calendar 2009, from a Q1 combined loss of JPY1.49 trillion, even though combined sales were still falling some 24% YoY. In other words, deep cost cuts and production cutbacks were responsible for the earnings recovery, not a noticeable improvement in top line sales. While shrinking only 1/9th the losses of Q1, manufacturers still had a combined pretax loss of JPY255.2 billion yen, about one-ninth the level sustained during the January-March period. On the other hand, Nonmanufacturers' pretax profit was up 38% to 1.23 trillion yen.

Consequently, the recovery back toward 10,000 on the Nikkei 225 from March lows was supported by an improvement in economic and corporate profit fundamentals. For Japanese stocks to continue rallying through Q3 and into Q4, however, continued improvement in economic and earnings fundamentals is required so that the market can again be valued on actual earnings valuations. Because of depressed earnings, the Nikkei 225 is trading on a forward P/E of 42.5X, a PBR of 1.3X and a dividend yield of 1.48%, while 10-year JGB yields have climbed back up to 1.415%.

If the consensus Q2 Japan GDP 4%+ annualized growth versus the minus 1% annualized Q2 GDP for the US is any indication, Japan's economy could rebound faster vis-a-vis the US on the upside in much the same way as it plunged faster on the downside. In terms of stock prices, however, the Nikkei 225 has been trading in line with the S&P 500 virtually tick-for-tick since the March lows.