After a positive start to the year, a slowing economic recovery and concern over banking stability d...
After a positive start to the year, a slowing economic recovery and concern over banking stability depressed the Japanese markets in the latter half of 2002 and the main Topix index ended the year down 18%. It is cold comfort to note that Japan's performance was better than many other key markets such as the S&P 500 and the FTSE All-Share in the UK.
The economy made some progress, as industrial production recovered in the first eight months of the year and consumption was more buoyant than those outside the country might suspect. The consensus is that economic activity will weaken slightly in 2003. The good news is firms are cutting costs and profit margins should rise in this fiscal year.
Japanese managers can usually lower costs successfully. But they have found it harder to tackle the deeper structural adjustments that are sometimes necessary to ensure the long-term health of an organisation.
In this respect, some recent developments have been encouraging. ' Hitachi's announcement that businesses accounting for 20% of its colossal $66bn in revenues are candidates for sale, for example. Investors will be watching out for similar steps from other companies this year.
An emerging theme for 2003 relates to dividends. Many companies are correctly censured for paying low dividends with nary a rise from year to year.
One explanation is a historical lack of interest among individual investors because of tax complications. However, a new regulation that attempts to simplify the taxation system from April should stimulate interest in dividends.
No one is going to get rich quickly by relying on the dividends Japanese companies are currently paying. But it is worth noting that, after the sustained fall in domestic bond yields, a 2% yield on a share can look enticing to a domestic investor who seeks some income. At the moment , the yield on the Japanese stock market is 1.4%, compared with a 0.8% yield on 10-year government bonds.
It looks as though this will encourage interest in stocks that already have higher yields. But it would be heartening if individual investors began to influence corporate behaviour too. There is a long list of Japanese corporations with steady businesses, limited investment requirements and the ability to pay more to their shareholders.
In truth, active institutional investors have had a limited ability to shed the 'asset stripper' tag and influence this situation for the better. There is little doubt companies that hoard cash unproductively do their shareholders a great disservice.
The conundrum for investors is whether, after three years of falling markets, valuation levels are genuinely attractive from a longer-term perspective. The answer is that it depends on where you look.
Although there remain stocks whose P/E ratios of 30 times or more belie their dreary operating performance, ratios on some large blue-chip names have fallen into the mid-teen range. This is one issue that will determine whether the Japanese markets can continue the recent trend of breaking away from other major markets of the world.
Spate of corporate restructuring.
Profit margins look set to rise.
Increased interest in dividends.
Economic weakness continues.
Cash hoarding damages shareholder value.
Some valuations still unattractive.
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