Despite promises by recently elected Japanese prime minister Keizo Obuchi to inject much needed fiscal stimulus back into the Japanese market through tax reforms and increased public works expenditure, analysts are adamant this will not be sufficient to redress the country's economic crisis.

Kathy Matsui, chief analyst for Japan at Goldman Sachs International, Tokyo, believes that although the proposals are better than nothing", they will not produce the sustained recovery needed.

The key to reviving the Japanese market in the long term is through addressing the question of corporate profitability, she says.

" We doubt any government initiative is going to drive up profits, unless the corporations themselves begin to restructure and attack their high fixed cost basis, which is the root of many of the current problems," she explains.

Her view is echoed by Takashi Nischizawa, senior economist and head of Nomura's London office:

" We are not seeing the fundamental changes necessary for recovery in Japan at the moment in spite of the change of leadership. What is needed is a complete restructuring of the employment framework to create a flexible labour market."

He also suggests the implemention of a pensions system along the lines of the 401k system in the US, to facilitate the mobility of employer benefit, currently not possible with Japanese company based schemes

"Only then will consumption in Japan increase, as the people start to fear less about future income," he says

The consensus view is that the Japanese market will have to undergo a great deal of pain before any gain begins to show.

Although the equity market rallied in the month prior to Obuchi's election, rising by around 13% following tax cut promises, long term predictions show a fall, as the Japanese continue to save because of job insecurity.

"Normally, we would expect a boost to GDP, with around 30%-40% of such a tax incentive being spent, but the Japanese people are not confident enough to do this at present," says Garry Evans, strategist for Japan at HSBC securities.

He adds that the government must also look closely at the country's micro-economic structure, which prevents hostile takeovers, thus reducing the pressure on companies to become more efficient, as another element of the current crisis.

Some headway is being made, he says: "For example, the takeover of LPCB by Scimitar Trust Bank, aided by government money, is a first in Japan and could be a model for future changes. But this is a temporary palliative and Obochi must bite the bullet and bring in wide reaching structural reforms of the banking and corporate sectors if any real change is to occur."

Predictions are though that the market cannot worsen. Nischizawa believes 'rock bottom' was hit in the latter half of 1997, and although he doesn't sense any kind of real movement before the last quarter of 1999, he feels there is a "sluggish recovery" in the air.

Goldman Sachs remain 'cautious' toward the Japanese market, but concede there is still continued liquidity in Japan from careful overseas investors, currently propping up the market downside, despite many investors remaining underweight at a quarter of the benchmark in Japanese equities.

This investment is clearly being directed at those companies being shown to give shareholder profits, such as the so-called 'nifty fifty' blue chip companies, in fact comprising of around 10 groups such as Sony and Honda with strong US and European exports, boosted by the weaker Yen.

Consumer goods and pharmaceutical companies, particularly those with strong corporate governance ethics are still performing fairly well under the circumstances.

However, investors are avoiding the risky financial sector, as well as corporations with deep cyclical orientations.

In the bond market, Evans at HSBC says 10 year government bonds, whose yields bottomed at 1.2% at the beginning of July, partly through profit taking, are now dribbling back to around 1.4%.

"They are not moving in step though with the economic solutions proposed by the authorities. This is in spite of the government pushing out new bond issues and financial packages to bolster the market," he adds.

He feels this is due to hesitant foreign investors, who feel Japan is the obvious market to go up, but are extremely cautious in making any moves.

This 'wait and see' message from the bond market, confirming Japan's deflationary status is now also permeating the equity market, according to Matsui:

"Equity traders are finally realising that conventional policies will not do the trick for the Japanese economy, and that the real problem of the country's bad debts must be addressed before any recovery can be achieved. No amount of tax cuts in the world will solve the current crisis, all they offer are temporary blips."

Criticising the governments transferal of private debt to the public sector via bridge banks as mere stage management, she calls for a real debt workout programme. "We must tackle issues of excess leverage in the corporate sector and the lack of liquidity in the real estate market. If we fix these then we could see a powerful economic recovery. But I see no positive steps being taken in this direction yet," she says. Hugh Wheelan"

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