The major concern for the Japanese economy still remains the banking industry. There has not been an...
The major concern for the Japanese economy still remains the banking industry. There has not been any real growth in the sector and significant bad debt in the banking sector has undermined confidence in the community, according to fund managers.
The Topix bank sub-index has fallen 22.36% for the two years to 30 March, compared with a rise of 2.17%, in yen terms, in the Topix. Sheila Martin, director of Japanese Equities at Clerical Medical, says: "The bad debt problem needs to be worked out before any recovery will be seen."
Although there have been talks by the government for banks to write off bad debt, Martin does not believe this is likely to happen. .
She says: "There is too much at stake politically to write off bad debt. There is a general election in July and the parties need votes from major players in the industry to be able to win. If the banks write off bad debt, the construction and real estate industries are likely to suffer and go bust."
Akira Hiramine, chief investment officer at Invesco in Tokyo, disagrees and believes the Japanese banks will write off bad debt. He says: "There is a consensus in the Japanese community and economy that the banks will do this."
Hiramine expects banks will start writing off some debt in coming weeks and again in November. "When this does happen," he says, "it is expected that the economy will move into recession and have negative growth.
To avoid this, the Bank of Japan will have to start putting liquidity back into the market. The government will start spending money and the Bank of Japan will buy US dollars to increase the money supply and weaken the yen."
While the banks are performing poorly, the conditions in the Japanese economy are currently supportive of the equity market. Hiramine believes the weakening yen, increase in liquidity and government spending will all help the equity market.
At the sector level, he expects technology will make a recovery and the domestic market will be a beneficiary of increased liquidity. He says Murata, which manufactures and sells ceramic applied electronic components, will come back because of the introduction of third generation mobile phones in May 2002.
Martin says auto stocks have been a big beneficiary of a weak yen and have been gaining market share in North America. However, she believes they have been overbought and are now performing at their peak.
Clerical Medical has an underweight position in the sector and an overweight position in pharmaceuticals because they have good cash flows and are defensive in nature.
Fund manager at Chase Fleming Max Wood says concerns over the US slowdown and a deteriorating domestic outlook have created uncertainty over the outlook for Japanese corporate earnings.
He says: "The resulting fall in the stock market has seen the Nikkei 225 reach depths not seen since the mid-1980s. We strongly believe that at these levels, the market is materially oversold and feel a rebound is possible."
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