The year 2000 was not successful for investors in the Japanese stock markets. The Topix index, for e...
The year 2000 was not successful for investors in the Japanese stock markets. The Topix index, for example, lost 25% of its value over the period because of yen weakness.
At the start of 2001, the Japanese economy does appear to be entering a lull in its recovery phase. Without evidence that the consumer is ready to increase his spending, there is a chance that the manufacturing sector, where activity had previously been expanding, will lose momentum, and that capital spending by corporate Japan will also slow.
On the positive side, the yen's weakness since last November ought to help the economy. Policy steps to inject some additional impetus are also possible.
However, the Bank of Japan may not wish to reverse its August move to modestly tighten monetary policy, and recent comments by the Bank's governor highlighted the need for the authorities to press on with structural reforms rather than adjust policy to provide temporary growth.
The opaque process that installed Mori as Prime Minister has left the Government's popularity low, which will make it difficult for radical fiscal stimulus to be used, particularly given the poor state of the public finances.
From the perspective of investors in Japanese companies, one of the most encouraging developments of 2000 was the continuing impact of corporate restructuring, which raised profitability across the board.
Japanese managers often put off painful restructuring when demand improves, so the beneficial aspect of the pause in the recovery will be to maintain the impetus for changes that will benefit shareholders.
One possibility is that any deterioration in the economy turns out to be of limited relevance to profits and market performance. In the near term, much depends on the extent of the slowdown in the US - many companies in important Japanese sectors will find the benefits to profits of a weaker yen offset if demand from North America falls markedly.
Market talk has been dominated in recent weeks by concern regarding excess supply of stock from corporate cross-holdings and new issues such as NTT DoCoMo's proposal to sell $8bn worth of shares.
The falling stock market last year made it easier for the Post Office to retain over half of maturing deposits, limiting the inflow into the equity markets.
Foreign investors also lost their enthusiasm for the market. There is no particular reason to expect the excess supply situation to reverse in the near term.
However, Japan's public funds should be natural buyers of equities from April onwards. Ultimately though, profit performance will drive demand for individual shares, and the market PER is now at its lowest level in many years.
Hamish Dingwall is fund manager at Baillie Gifford
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