The recovery in Asia's economies has resulted in a pick-up in Japanese exports to the region. As a r...
The recovery in Asia's economies has resulted in a pick-up in Japanese exports to the region. As a result, industrial production is rising, thanks in part to the reduction in stock levels through 1998 and most of 1999; and this, in turn, has led to an increase in profits for companies in manufacturing.
This should benefit the consumer because higher manufacturing profits may lead to bigger bonuses for employees - which will help to strengthen household income. Improving household incomes should boost consumer spending, which contributes around 60% of GDP. This, in turn, will support the economy during 2000.
Evidence from recent economic data suggests that Japan's new industries are leading the economic recovery. For example, the percentage share of consumer spending on services is growing much faster than consumer spending on goods. A Ministry of Finance survey also shows that growth in sectors such as telecommunications and IT is outpacing other industry sectors.
The same is true of the stock market. The growth sectors have powered ahead while the others have been left trailing. Most of last year's gains were concentrated on a handful of growth companies and industries. Indeed, during the fourth quarter last year, only six out of a total of 36 sectors performed well. The rest languished.
The concentrated performance of the stock market was intensified by attempts to reduce the welter of cross-holdings that have long been a part of the corporate landscape in Japan. The result has been a decline in the share prices of many companies within Japan's traditional industries.
This year, we expect investors to continue to focus on technology-related stocks. Japan's retail investors have been encouraged by the spectacular gains that many of them have made from initial public offerings. Coupled with that is a widespread scepticism among domestic investors about the strength of the economic recovery and the near-term prospects of many of the country's traditional industries.
The market's decline during January was more a reflection of the fact that the euphoria at the end of last year had been overdone than a change of direction. Many of last year's high-flying sectors underperformed as investors took profits. Over the next few months the stock market is likely to remain volatile. The successful launch of a number of new investment trusts most notably Nomura's aimed at retail investors is likely to support the market. But there are worrying signs, too, that the pace of reform is slowing. For example, plans to reform corporation tax and to introduce a new form of pension scheme have been delayed.
In the near future, we believe technology-related stocks will remain under pressure. Against that is the fact that the economic outlook as a whole is improving because of a resumption in capital expenditure from private sources.
Jonathan Bolton is divisional director at Schroder Investment Management
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