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Investors should buy shares in Japanese real-estate companies because demand for offices and houses is likely to increase as the central bank keeps borrowing costs near zero, said Bank of America Corp.’s Merrill Lynch & Co.

Tokyo’s office vacancy rate has fallen for the first time in 2 1/2 years, demand for housing is rising and a decline in land values has slowed, making real-estate more attractive, Merrill Lynch strategist Masatoshi Kikuchi said. The Bank of Japan, which kept borrowing costs unchanged yesterday, should also help to spur a recovery in real estate, he said.

“We can see now that the decline in demand for real estate has pretty much bottomed out,” Kikuchi said in an interview in Tokyo. “Also, because Japan’s interest rates will remain low, we should see a recovery and investors should start buying these shares.”

The Bank of Japan kept the benchmark overnight rate at 0.1 percent, where it has been since December 2008. The Topix Real Estate Index, measuring 44 property-related stocks, has risen 12 percent from this year’s low on July 22, compared with the broader Topix’s 0.5 percent decline during the same period.

Tokyo’s office vacancy rate fell in July for the first time since January 2008, according to an Aug. 5 report by Miki Shoji Co., a privately held office broker. The number of condominiums offered for sale in Tokyo and surrounding areas rose 27.8 percent in July from a year earlier, the Real Estate Economic Research Institute said on Aug. 16.

Land Values

Japan’s land values also declined at fewer sites for a third straight quarter as property companies started to purchase land amid a recovery in housing demand, the Ministry of Land, Infrastructure, Transport and Tourism reported Aug. 24.

Kikuchi told a seminar yesterday in Tokyo that Japan’s stock market should recover further next year, with the Topix index rising to between 9,000 and 12,000 from January to March as the global economy strengthens. The Topix closed at 820.99 today.

While foreign investors now view Japan’s equities as a minor part of their global portfolios, Japan should be able to capitalize on Asia’s emerging growth and increase interest in Japanese companies, he said.

Top Ranked

Kikuchi spoke yesterday at an investment seminar attended by more than 1,700 people, including 300 foreign investors. The number of foreigners at the annual conference jumped from 279 last year, an increase that shows overseas interest in Japanese equities has risen, Kikuchi said.

Kikuchi was rated Japan’s top strategist in rankings by the Institutional Investor magazine’s 2010 survey and came second in the Nikkei Veritas newspaper’s Japanese strategist rankings this year, according to Merrill Lynch.

At a seminar on Jan. 13, Kikuchi said the Nikkei 225 Stock Average would rise to 13,000 from 10,735.03 by about May as a weaker yen bolstered company earnings. The gauge climbed 5.6 percent to this year’s high of 11,339.3 on April 5, and then plunged 12 percent in May.

Kikuchi also said the Nikkei 225 may rise 12 percent to 8,500 by the end of March 2009 in a note to clients on Feb. 27 last year. The gauge closed at 8,636.33 on March 26, 2009, and rose 7.2 percent that month.

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