Even though April is supposed to be the cruelest of months, for Japanese equities there are signs that that will not be the case this time around.

The Japanese fiscal year ended today, with the


finishing at 15,836.59 -- its 14.4% rally since January putting it just 4% below its close last year of 16,537. And it's quite a way up from its October low of 12,879.

We always hear about how stock-market recoveries precede economic recoveries, and to some the recent rally in the Nikkei suggests the worm has turned in Japan. Moreover, the suggestion of a recovery in stocks could do good things for confidence in Japan. And a lack of confidence -- among consumers, among companies, among banks -- has been such a big part of the trouble in Japan.

It's a classic liquidity trap: With everybody worried about the future, much of the money the government spends trying to spur a recovery ends up getting added to bank accounts rather than to the economy. The government is not blind to that. In its outlook for the economy in the new fiscal year, the

Economic Planning Agency


The economic situation in Japan is extremely severe. Under waning confidence in the management of financial institutions and uncertainties over employment, households and businesses are adopting cautious stances, which result in decreasing final demand...

If you could somehow turn that on its head and get people feeling up about the future, then the vicious cycle would turn virtuous, beckoning recovery. A positive return on stocks could be a step in that direction.

'Nobody wants to miss out on the first couple of quarters of a bull market in Japan,' says Merrill Lynch's Michael Hartnett.

The government no doubt knows this, too. What is more, it is so widely maintained that it intervenes in the stock market through public-pension funds that the Japanese press has coined a term for the practice: price-keeping operations. So there was some thought that there may have been a little government-directed buying in the Tokyo rally.

Conventional wisdom says the Tokyo market always gets a bid in March as the government compels funds to buy, and then trades back down in April. There's probably some truth to that -- stocks have at least a bit of trouble in those first couple of days of the fiscal year, just as the U.S. market often has trouble in early January. But since 1990 -- which is to say, since the Japanese stock market topped out -- the Nikkei has lost ground in April five times and gained it four. Not a very convincing trend.

And for all the talk about government-sponsored buying, there is a sense that the rally since January has been more about foreign buying -- and that the March move was all about foreign buying. Through Friday, foreigners had put 1.9 trillion yen into the stock market. Trusts, insurers, banks, financials, individuals and companies have all taken money out.

"If you look at the way the actual market has traded, it's been foreigners who have bought," says Ron Napier, the former

Salomon Brothers

chief Asian economist who now runs

Napier Investment Advisors

in Austin, Texas. "The Japanese have sold very actively into that. I've been telling my clients that this is a false rally."

Cross-Shareholdings Pressure Seen Easing

There may be other reasons besides bearishness for Japanese investors to be less-than-active Nikkei buyers these days. A lot of companies are believed to have been unwinding cross-shareholdings ahead of the fiscal-year close. Cross-shareholdings are the vestiges of the old conglomerates, in which affiliated companies hold shares in each other. At the end of the previous fiscal year, about a quarter of the Japanese stock-market capitalization was tied up in cross-held shares. Companies have a lot of gains tied up in these shares -- they bought them long ago -- and many were keen to raise money and pad their year-end results. From an efficient-market perspective, too, the unwinding of these relationships would be a good thing -- it would make for a less opaque market.

The downside is that when companies sell, that exerts pressure on the stock market. This year, that pressure is believed to have been more intense than in the past (and even if it is not, that belief itself exerts pressure on the market). If you are a Japanese investor, even though you believe the economy's prospects have improved, this may keep you out of the market until the new fiscal year. Or more specifically, it will keep you out of the stocks where there are cross-shareholdings -- broadly speaking, the large-caps. Others, you will buy.

It appears that something along these lines has happened. Over-the-counter stocks have done significantly better than their big-cap brethren. This year the


has added 45%. These are not the types of stocks that a U.S. teacher's pension fund with no research arm on the ground in Tokyo is investing in. The Jasdaq's outperformance suggests that there actually will be a bid coming into the bigger stocks in April.

And then there is the issue of sentiment. Though it did not quite top its close last March, the stock market's performance is improving the mood in Japan. More important, the


-- Japan's quarterly read on business sentiment and its most closely followed economic report -- comes out next Monday. Expectations are that it will be good.


economist Takashi Nishizawa wrote recently that if the survey confirms an improvement in sentiment and a rise in corporate earnings in the second half of the fiscal year, it "would provide sufficient support to the market to sustain the recent sharp rise in prices, and even provide room for further rises."

And should stocks continue to travel, more investors would become convinced that the move in Japan is something more than a head fake. A lot of the recent foreign buying is probably the result of global managers going to neutral positions on Japan from underweight -- and it is likely that there could be more asset-allocation gains as people become convinced that Japan really has turned the corner. Says Michael Hartnett, senior international economist at

Merrill Lynch

: "Nobody wants to miss out on the first couple of quarters of a bull market in Japan."

But while Napier believes stocks could continue to propel themselves higher in April, he thinks the move will be short-lived. Sure, sentiment's getting better. But then the jobless rate for February, released yesterday, came in at 4.6% -- a new postwar high. Last Friday, industrial production showed a 0.6% decline against expectations of a 0.5% gain. And calendar fourth-quarter domestic product, released earlier in the month, contracted by an annualized 3.2%.

"Sometimes perception or just optimism dominates things, and we're in one of those periods," says Napier. "It won't last because you're going to have to react to the fundamentals that won't be good."