Apathy reigns in Japan. The stock market is drifting at close to 20-year lows and foreign investor...
Apathy reigns in Japan. The stock market is drifting at close to 20-year lows and foreign investors are losing interest. There are many reasons why sentiment is so poor.
Equity supply and demand is unbalanced. Foreigners, accounting for 54% of market turnover, have sharply reduced their Japanese equity weightings over the last year. Banks are sellers ahead of the September 2004 deadline to reduce equity holdings while companies can now return part of their pension funds to the government in cash.
On the buying tack there are companies buying back their own shares, government-influenced pension funds and the Bank of Japan. Share buy-backs are growing in frequency with Toyota and NTT DoCoMo leading the way, but a change in tax law may well encourage higher dividend payouts rather than more buy-backs. The Bank of Japan is buying ¥2trn to try to stem the tide of bank selling. So far the 'technical' buyers have struggled to absorb the selling from 'real' investors.
So why are foreigners losing interest? Policy stalemate is the main reason they have been reluctant to take advantage of such a weak market. There has been tremendous disappointment regarding the efforts of the Koizumi government to halt deflation or to properly address the problems in the banking system.
Hopes that Mr Takenaka's appointment as head of the Financial Services Agency would speed up the disposal of non-performing loans and nationalise banks with negative net worth were dashed when this proved to be too much for the Liberal Democratic Party's old guard who watered down most of the plan. The establishment of the Industrial Revitalisation Corp will merely serve to support dinosaur companies; overcapacity needs to be taken out from inefficient industries to enable survivors to improve profitability.
The anti-deflationary pack- age was also a disappointment. An aggressive plan to dispose of bad loans needs to be counter balanced by both monetary and fiscal stimulus. However, government spending remains contractionary.
The outlook for the economy is poor. Exports, the only area of growth at present, are subject to the continued (shaky) confidence of the US consumer. With deflationary expectations worsening, both government and Bank of Japan polices would seem to be inappropriate.
At a time when the Federal Reserve is easing, the money supply in Japan is stagnating. The efforts from the Bank of Japan are too weak to offset credit contraction. While the banks have successfully re-financed, albeit at usurious rates, they are aggressively reducing their risk assets, potentially leading to a credit crunch. The benchmark JGB is yielding 0.7%.
On a more positive note, a rally in global stock markets would offer a glimmer of hope although the market would probably lag due to Japan-specific factors. Better economic data or corporate earnings could drive such a rally. Strong economic growth in China may be sufficient to prevent global deflationary forces from gathering momentum.
Low valuations offering downside support.
Firms proactive and shareholder friendly.
Rally in stock markets would benefit Japan.
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