Investors' reaction to the Bank of Japan's quarterly Tankan survey of business conditions, released ...
Investors' reaction to the Bank of Japan's quarterly Tankan survey of business conditions, released recently, neatly highlighted the evident desire to paint the most optimistic hue on any economic or corporate announcement forthcoming from Japan.
Whereas the stock market and the currency appreciated in response to the improvement seen in business sentiment, albeit from a low base, the bond market also rallied, somewhat counter intuitively, largely in reaction to the disappointing forecasts for corporate capital expenditure.
Similarly, the recent releases of poor economic numbers, and there have been many. Retail sales, construction starts and machinery orders have been taken as confirming the need for, and ensuring the enaction of, a more radical and sustained programme of corporate restructuring than would have been the case if light could be seen at the end of the economic tunnel.
Certainly in terms of news flow there has been no shortage of corporate restructuring announcements. Over the past couple of weeks we have seen Mazda announce that it is to source all its steel sheet from one supplier, Nippon Steel, rather than the previous six. And Toyota announced it is to move from a seniority based pay scheme for all 20,000 white-collar workers, while the conservative Daiwa House removed their President at their AGM following a collapse in orders.
Although the stabilisation of the banking system following the government's ´17 trillion injection at the end of 1998 and the ample market liquidity resulting from the Bank of Japan's activities in pursuing a zero interest rate policy have been a necessary foundation for the Nikkei's 30% year-to-date move, it has been the momentum of corporate restructuring announcements that have largely driven and maintained this strong performance.
The real difficulty faced by asset allocators, though, is to quantify the effects of all these measures in terms of profits. Foreign investors, predominantly American and continental European, however, have been seemingly willing to suspend judgement on the ultimate results and to play the momentum. The sheer weight of foreign buying and the market's consistent upward trajectory has forced many, reluctantly, to follow suit.
The real risk is that with the economy unlikely to exhibit any significant positive growth for the next two years as consumption and capital expenditure, which together account for 75% of GDP, remain under pressure, the restructuring will not be substantial enough to raise earnings to the levels that are currently being discounted in the market.
It must also be borne in mind that the corporate changes underway in Japan, radical by Japanese standards, pale with international comparisons.
The mergers taking place within the Japanese oil industry or banking sector to reduce capacity and improve efficiency are dwarfed by the mega mergers that have occurred within the international oil majors or within US or European banks.
There is every danger that in relative global terms Japan will continue to slip back against its international peers.
Nick Reid is investment manager at Gartmore Investment Management
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