Finally, Japan may be emerging from the deep economic crisis of the past few years. Recent signs of an upturn in corporate results show this is no false dawn, strategists say. Restructuring within Japanese companies and in particular within the country’s plagued banking sector is starting to pay off.
So now could be a good time to build up holdings in Japanese shares – providing the yen’s strength does not sour the mood. The Nikkei 225 index has risen to around 18,000 from 13,000 at the beginning of the year, and this time market experts believe the rally could be sustainable.
“The market has come back mainly because of domestic buying, and that is a positive sign,” says Dick Beason, chief strategist at Warburg Dillon Read in Tokyo. “Support until a few weeks ago had been from foreign buyers.”
Goldman Sachs’ Tokyo-based chief strategist Kathy Matsui is bullish. Investors, she says, should adopt an overweight stance in domestic equities and an overweight position in Japanese stocks within global portfolios.
“The possibility of a self-sustaining, private sector demand-led recovery is now in sight,” she says. Conventional economic statistics have underestimated consumption, she says, particularly in areas such as cellular phones, Internet usage, PCs, minicars, and condominiums. Growth in these areas has been supported to a great extent by demand for goods from women, Matsui says.
Radical social change in Japan over the last 15 years has in many ways boosted female consumption. Attitudes toward marriage and employment trends have changed, and there has been a dramatic rise in the number of single-female households, says Matsui. Spending by such households has been rising even though it has been falling for other households.
As a whole, the economy is clearly expanding, and this looks set to continue. GDP in Japan grew 0.9% in real terms in the second quarter of this year. Goldman Sachs economists forecast 1.2 % real GDP growth for fiscal 1999 and 0.8% for 2000.
But there are always risks, and Matsui believes the main risks facing the market include earnings disappointments, a sudden rise in short-term interest rates, and global inflation. “However, we would regard any substantial market correction as an opportunity to buy rather than to sell,” she says.
Alexander Kinmont, Japanese equity strategist at Morgan Stanley, says he is basically optimistic about the Japanese market. The economy is back on track and growth is likely to be sustained, “but it will be weak compared with previous recoveries,” he adds. He expects a gentle upswing in the Nikkei 225, with the index reaching 19,000 by the end of the year, and 20,000 in six months.
Beason predicts the Nikkei 225 will rise to around 20,500 by the end of the year, with most of the impetus for that increase coming from corporate earnings. “Some of the half-year figures coming in are already good,” he says.
Year-on-year, he expects corporate profits to show growth of up to 10%, but at the recurring level, growth should be around 16%, he says. However if the yen continues to strengthen, this would hit corporate profits.
Goldman Sachs analysts say yen appreciation may lead them to revise their earnings forecasts downwards in the near-term. But even if the currency unit averaged 95 to the US dollar during the second half of the fiscal year, compared with around 106 now, consolidated recurring profits would still grow in fiscal 1999 and 2000 because to restructuring efforts, they say.
Time and again the Japanese government has tried to stimulate the economy with various fiscal packages, and prime minister Keizo Obuchi has just confirmed another supplementary budget to come. But Beason believes these rafts of fiscal measures have been of little real help to the equities market. Instead of the immediate benefits, market players tend to focus on the probable tax increases to come, he says.
It is Japanese corporate restructuring that is the dominant factor behind the market's recovery. “The pace of cost cutting last year accelerated pretty dramatically,” he says. “It has very little to do with fiscal packages. The strength in GDP has been from the consumption side.”
However, Kinmont believes the steps taken by the government were essential. No amount of corporate restructuring would have made a difference if the economy had been sinking into a bottomless pit, he says.
“Japanese companies are changing from giant social clubs to wealth-maximising organisations… however slowly,” he says. This turnaround will eventually solve all the other problems in the economy, he says, with higher productivity leading to greater wealth.
Even though share prices have already shot up, now is still a good time for foreign investors to buy into the Japanese market, says Beason. “We’re still in a position where the market hasn’t priced in all the earnings,” he says.
Bond yields are still extremely low compared internationally, but analysts see them rising slowly as the economy becomes more robust. Goldman Sachs forecasts a 2.5% 12-month total return for Japanese government bonds, compared with 10.2% for domestic equities.
The Bank of Japan will maintain its zero interest rate policy, Matsui forecasts, with deflation likely to persist due to excess capacity.

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