During the third quarter of 2000, the FTSE Japan Index fell 7.3%. The decline was despite signs of ...
During the third quarter of 2000, the FTSE Japan Index fell 7.3%. The decline was despite signs of improvement in the fundamentals.
On the economy, consensus forecasts for GDP growth have moved up to +1.7% for 2000 and +2.0% for 2001. The Tankan survey of business confidence showed a further improvement in its index of large manufacturers' sentiment from +3 in June to +10 in September, its highest level in more than three years.
It would appear Japan is making progress towards sustainable growth. Indeed, while the US and Europe are showing signs of a slowdown, Japan is the only G7 economy where economic growth is picking up.
On company profits, analysts have revised their expectations upward to around +25% for the year to March 2001. Valuations look reasonable.
The forward P/E ratio on the Institutional Broker Estimates Service (IBES) forecasts is around 32 times, falling to 25 for fiscal year 2001. Excluding extraordinary items the underlying P/E is 23.
This is a level last seen in the early 1980s and is similar to the figure for the US, even though the US has higher interest rates. Furthermore, the bond-equity earnings yield ratio of 0.7 is historically low.
During the lost decade of the 1990s, when Japanese GDP was stagnant, there were times when the implied Equity Risk Premium (the sum of the equity-bond yield gap and the expected long term earnings growth rate) turned negative. An improvement in the expected growth rate gives scope for the implied equity risk premium to expand.
Looking at risk factors, an important factor influencing the decline in the stock market in the third quarter has been a negative supply/demand background from sales of cross-shareholdings.
Cross-shareholdings are shares which banks and companies bought in each other many years ago to cement business ties.
Companies have been selling these shares to book profits and strengthen balance sheets. Sales of cross-shareholdings tend to be seasonal and are typically in the lead-up to the end of the fiscal year in March and the interim results in September. Sales may ease as companies increasingly entrust cross-shareholdings to pension funds to offset unfunded liabilities.
The supply/demand balance may improve in near terms as a result of the forthcoming large government sale and new issue of Nippon Telegraph & Telecoms (NTT) shares. Also boosting the outlook for a positive supply/demand factor is an estimated ¥80trillion of long term postal savings (teigaku) accounts which will mature in fiscal years 2000 and 2001, and some of this is flowing into stock investment trusts.
David Hodgson is a senior fund manager responsible for Japan and Pacific Markets at Swiss Life (UK) Investment Services.
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