National Bank Financial is reiterating its call that investors should overweight Japanese equities.

“Japan has been on a roll in 2005. Year to date, the Nikkei 225 has climbed almost 23% (but only 6% in US$), the strongest performance of all G-7 countries,” it says. “The index recently reached a four-year high to outperform the S&P 500 by 21% so far this year, a situation not seen since 1988.”

“It is worth noting that the burst of the Japanese real estate bubble in the late 80’s has been followed by a significant underperformance of the Nikkei relative to the S&P 500,” NBF notes.

“Contrasting with previous market upswings, the strong showing of the Japanese index relies on stronger economic foundations. Indeed, Japan’s many recoveries of the last 15 years have until now been essentially a matter of government spending or exports. This time around however, not only did growth accelerate strongly in the first nine months of the year, but for the first time since 1991 the main drivers were consumer spending and business investment,” NBF explains. “Other factors include an ultra-expansionary Bank of Japan monetary policy as well as the economic reforms put in place over the last four years by the Koizumi government.”

The market is expecting profits to continue to grow at a healthy rate, it adds. “In 2006, the consensus calls for a 37% growth in aggregate Japanese earnings, the best among G-7 countries.” “For all these reasons, we reiterate our recommendation to overweight EAFE equities (mainly Japan) relative to US equities,” it concludes.