The downward pressure on the world economy created by the terrorist attacks in the US will clearly h...
The downward pressure on the world economy created by the terrorist attacks in the US will clearly have a major impact on the Japanese stock market.
The earnings of several Japanese corporations will be negatively affected by a fall in external demand. However, the success or failure of Japan's prime minister in carrying out his reform plans remains crucial to the long-term health of the economy and stock market.
The challenges ahead for Koizumi are immense and he has many political enemies, even in his own party. If he fails to deliver on his promises and his popularity falters, his opponents will be quick to openly criticise him.
Koizumi also faces the problem of balancing short-term economic stability with long-term reform. None of his proposed solutions will help Japan's problems immediately and, indeed, many will cause pain in the short term. His proposed reduction of government bond issuance calls for a cut in public spending at a time when the economy is in a cyclical downturn.
The budget for the next fiscal year is already taking shape in a way that will realise his structural reforms, including cuts in public works. His target is to keep new issuance of government bonds under ¥30trillion, cut ¥5trillion worth of unnecessary spending and spend ¥2trillion on reforms such as urban redevelopment and information technology.
A solution to Japan's bad loans problem is high on the political agenda. After a decade of dithering over writing off non-performing loans, Japan's city banks are still burdened by excessive bad debt. Disappointingly, the banks' managers, the regulatory authorities and analysts are in disagreement over how large the problem is. There are concerns that the banks still don't have a realistic loan appraisal system and are too loose with their categorising of loans. However, Koizumi and the Financial Services Agency (FSA) are talking tough and two new government initiatives have been announced.
The FSA has recommended that a Bank Equity Purchasing Institution (BEPI) be set up. This body will effectively purchase equities from the banks and act as a warehouse for them. The scheme is also intended to help ease supply/demand in the overall equity market by absorbing some of the banks' cross-holding sales. By 2004, the FSA plans to restrict the amount of equities Japanese banks can hold to no more than their shareholders' equity.
The other bank initiative being discussed by policymakers is to strengthen the role of the Resolution and Collection Corporation. This government agency will try to relieve the banks of distressed loans, especially if the city banks struggle to actually collect the loans themselves. The issues Japan faced in the 1990s of deflation, stagnant growth and falling equities still exist. It is vital that the government pushes on with these initiatives because the underlying profitability of the banks is still feeble.
Unfortunately, there may have to be a more direct injection of public funds into the banks, which will really be a quasi-nationalisation in disguise.
Solutions for bad debt high on agenda.
Public opinion in favour of Koizumi.
Market should rally if Koizumi delivers.
Koizumi has many political enemies.
Many reforms will cause short-term pain.
Underlying profitability of banks still feeble.
Fraser Chalmers, head of Japanese equities at Standard Life Investments
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