Japanese stocks are hovering at fresh seven-year highs as investors ignored a sovereign debt ratings downgrade by Moody's to focus on a slumping yen, but analysts say further upside could be limited as markets gear up for the national elections in two weeks.
According to Kenji Shiomura, Daiwa's senior equity strategist, a poor attendance by voters could knock the wind out of Nikkei's rally as investors see it as a sign that voters aren't backing Prime Minister Shinzo Abe's economic policies.
"I don't see any major upside - turnout is expected to be at a historical low, and the markets will take that as a sign that voters aren't convinced about Abe's economic policies," said Kenji Shiomura, Daiwa's senior equity strategist. Still, Shiomura is forecasting the Nikkei will end the year at around 18,500.
After a ho-hum performance for much of this year, the Nikkei caught fresh momentum after the Bank of Japan in October shocked markets by expanding its already massive asset-buying program for the first time since it was rolled out in April last year. The Nikkei surged 12 percent since and traded at 17,772 on Wednesday, as the yen crumbled nearly 9 percent against the U.S. dollar.
Even a Moody's downgrade of Japan's credit rating this week, by one notch to A1 from Aa3, didn't deter the rally.
Abe called the snap election scheduled for December 14 last month after data showed the country falling into recession, with its economy shrinking an annualized 1.6 percent in the third quarter, following the second-quarter's 7.3 percent contraction.