Still sliding downhill fast
Within the space of a year, Japanese stock values have almost halved. Cracks in the economy’s banking system have widened and falling equity prices in New York are also weighing heavily on market sentiment in Tokyo. But there is still hope, say equity strategists.
Precisely when the market’s downhill slide will come to a halt is hard to predict, says Yukiko Kawamoto, head of Japanese equities at HSBC Asset Management in Tokyo. “Journalists here are saying Japan’s financial system is bankrupt, and nobody is trying to fight back, so the discount is forever increasing,” she says.
From a fundamental perspective, Japanese stock valuations are cheap compared to the US, she says. They are trading at about 30 times earnings and at around twice book value, compared with 25 times earnings and four or five times book value for US stocks – and this with the huge interest rate differential between Japan and the US.
“If you disregard everything else, then Japan looks better, but people believe the Japanese economy is bankrupt,” she says.
The market is bound to benefit at least temporarily from a bounce just before the end of the fiscal year, but after then it is hard to predict where prices will head, says Nick Read, senior investment manager at Gartmore in Tokyo. “It depends on action from the government... but the political situation is so unstable at the moment.” Mika Katata, strategist at Morgan Stanley in Tokyo, also believes it will take some political event to trigger a reversal in the market’s fortunes
If the government does make reforms to prop up the economy, says Read, these measures could be seen as negative in the short-term, because from a western point of view they are unlikely to be shareholder-friendly. In the long-term, however, they will have a positive effect.
Finance minister Kiichi Miyazawa cheered the market up somewhat in March when he said the government would consider using public money to back a private fund to cushion the effect of cross-held share sales.
The financial system in Japan is still plagued with bad debts, but Kawamoto points out that the level of unrecoverable loans was much worse last year than it is now. “It is improving,” she says.
In March, three banks which are set to merge in April – Sanwa, Tokai and Toyo Trust & Banking – said they would double their loan-loss charges, raising hopes that Japanese banks would resolve their bad-debt problems. Read sees this as a good sign that Japanese companies are being more upfront about their problems rather than sweeping them under the carpet.
By September, the Japanese market should have experienced a rebound, says Katata. “We think the current market level is close to bottom,” she says, concentrating on a technical analysis of the market. “I really don’t know if this recent sharp fall is going to be the last – it is more likely that we will see a second or third one coming in.
“The end of the fiscal year will be the turning point for investors if market sentiment is going to turn to the opposite direction,” she says.
Though the Japanese economy in many ways appears fundamentally sound, the market is heavily dependent on outside forces, say strategists. Corporate restructuring has been carried out and is still going on, but the market is still heavily weighted towards technology stocks – a sector which is in global decline at the moment.
Worries about serious weakness in the US economy also affect the Japanese market, so much depends how Wall Street proceeds.
Read forecasts higher index levels for Tokyo by September. “I suspect that unless the US is going into recession, the market will be higher in six months’ time than it is now... the Japanese market is looking oversold at these levels.”
The Nikkei 225 has fallen to around 11,000, from about 21,000 in March 2000.
Another force keeping share prices in Japan at depressed levels has been the fact that large corporations are offloading stock as they dispose of their cross-shareholdings. But Katata says this concern will fade away after the end of the fiscal year, as this is the deadline for the unwinding of these positions.
While the fiscal year-end should herald a boost for stock prices for these reasons, there are still plenty of negative factors to dull any emerging bullish sentiment. “We still have macro concerns over the slowdown of the global economy and as for the dollar/yen, we don’t know how far this will fall,” says Katata.
Kawamoto also believes most indices will be higher in six months’ time. “If any epoch-making new policy is introduced then it will be substantially higher, but if there is no convincing policy coming from the government, it may not be much higher,” she says.
Elections will lead to a new upper house in the Japanese government in July, says Katata, with a new prime minister likely to come up with an economic package to salvage the economy. This means there is potential for more upside in the market in August and September, she says.