Japanese equities have had a hard time. Hit by the global sell off in technology stocks and undermined on the fundamental side by worries about slower-than-expected GDP growth, share prices on the Tokyo exchange have taken a hammering.
Equity strategists are cautious, but most believe the long-awaited recovery is still on track, and say corporate restructuring is still feeding through into earnings growth.
For the market as a whole, HSBC Investment Bank says in a report that it sees little chance of a big rebound in stock prices before the spring. An overhang of crossholding sales is likely to hit the market in the January to March quarter, it predicts.
However, valuations are looking increasingly attractive, it says. If the TOPIX index fell to 1,300, the bank says the benchmark’s price earnings ratio would be at its lowest level in 15 years.
Although HSBC analysts say they might be willing to cautiously buy back into some tech stocks with good long-term structural growth possibilities, they add that they are reluctant to take a big bet on these sectors right now.
“By next March, if it is clear that the semiconductor cycle is not turning down viciously, there could be an excellent buying opportunity. But for the moment we think it is too big a risk to take,” says HSBC. At this point defensive sectors are more appealing, such as drugs, insurers and real estate, it says.
Alexander Kinmont, Japanese equity strategist at Morgan Stanley in Tokyo predicts the market will rise out of current weakness, only to fall back again at the beginning of the next fiscal year. “The hi-tech sector will rally, taking the Nikkei 225 up to 16,500, but then the stock market is likely to give up those gains,” bringing the index back to 14,700, he forecasts.
The Nikkei 225 is now very sensitive to the trading fortunes of technology sector stocks, since changes were made to the index. If the old version of the index were still being calculated, it would stand at around 17,700, Kinmont says.
Some bearish market watchers have voiced concerns that the economy’s current weakness could indicate the country has actually fallen prey to a triple-dip recession. But Kinmont says these fears are overdone.
“It’s clear there is a lack of momentum in the economy. Certainly it is unlikely to accelerate, in fact it may decelerate,” he says. But that is not to say that the economic recovery has de-railed. “It’s an extremely unusual non-accelerating recovery,” he says.
Nick Reid, senior investment manager at Gartmore in Tokyo, says the economic picture is mixed. “There are a lot of concerns from economists that economic growth is slowing down,” he says. Recent weak GDP figures disappointed the market, and although capital expenditure is strong, government expenditure is falling off sharply, says Reid.
And because of the weak economic situation in the US, net exports are decreasing. Most significantly, the biggest component of GDP – consumption – has as yet shown no sign of recovery, says Reid.
HSBC, which has recently revised down its forecasts, now expects 2% GDP growth in both fiscal year 2000 and fiscal year 2001.
But Nick Reid says the weakness seen in Japanese market over the past six months is in line with the global collapse in technology stocks. This was unavoidable as Tokyo is heavily focused on technology.
“Fundamentals for many technology stocks are still looking poor, particularly in the US,” he says. Although now some value is being created in certain Japanese stocks in the sector, notably NEC, he adds.
“Looking further forward, we remain confident that corporate earnings will surprise on the upside,” he says. “With people revising their economic forecasts downward, they are also revising down their corporate earnings forecasts. But cost cutting means earnings can improve, even in a weaker environment,” he says.
Reid predicts that in six months’ time the TOPIX could put on 10%, bringing the benchmark to around 1,480.
HSBC forecasts the index will stay in a range between 1,350 and 1,550 until March, after which – as long as the fundamentals are still on track – there could be a good buying opportunity, particularly in technology stocks.
Interest rates are likely to stay at their current levels following the Bank of Japan’s much criticised decision last year to raise the rate from zero. Strategists say it seems now that the move was a mistake, but the central bank’s governor Masaru Hayami is more likely to resign than bring rates down again. Although such a resignation could prove to be one of the surprises of the New Year, says Reid.
However, in the meantime the central bank is likely to continue to inject a lot of liquidity into the market to keep rates from going higher, says Reid.
In December, market watchers were waiting to see how the MSCI index change to account for free-float would affect Japanese stocks. The move was expected to have a negative impact on the share prices of some companies with large cross-shareholdings and government ownership in shares, including NTT and Toyota.

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