Recent economic numbers and corporate figures from Japan have been disappointing ' September's indus...
Recent economic numbers and corporate figures from Japan have been disappointing ' September's industrial production fell 12.7% year-on-year, lower than consensus estimates and indeed the greatest fall since the 1975. Unemployment reached a record high of 5.3%, the largest increase since March 1967. However, there may be reason to believe that Topix has already bottomed.
The Bank of Japan's (BoJ) latest GDP forecasts suggest falls of 1.2% in the year to March 2002 and 1.1% in the following year, while the CPI number is likely to fall by about 1% in this year and next. We are part way through first half results announcements with most, particularly technology, below expectations.
That latest numbers have not been positive is not in question. However, little of the above is new information, as the results were predicted by top-down analysis. Figures for September may have been a little worse than expected, but for obvious reasons September was not a normal month.
Topix has rallied over the past six weeks from 990, a level not seen since October 1998 when the market bottomed at 980. Then, as now, we were looking at poor first-half results and an economy forecast to shrink for the next two years. Cross-shareholder selling was limiting any hope of market rallies and there were hopes for some positive action from the government on the banks. Forecasts were for US growth to slow to about 1% for next calendar year.
What followed the slump of 1998 was a 79% rise in Topix over 15 months. Part of this was due to the internet and technology bubble, while some was due to clear evidence of Japans attractiveness as market for investment where valuations looked (and, more importantly, still look) appealing. The market is trading with more than 60% of listed companies below book value on a market P/B below the 1.5x seen in October 1998 and on a P/E of 25x one year forward IBES numbers ' again lower than the 30.2x in October 1998.
The rally since late September shows the market is willing to look beyond current numbers to a recovery next year. The easing year-to-date by the Fed, taking rates from 6.5% to 2%, is historic, as are the fiscal actions in the US. The BoJ has also acted, cutting the discount rate to 0.15% while injecting substantial cash into the system. Global liquidity is on the side of the bull. Markets do not move in straight lines, so while the rally will have setbacks it seems possible to expect the current rally to continue.
Japanese performance post-October 1998 was not solely the result of global forces ' restructuring increased right across corporate Japan. Of those, only 54% of firms actually achieved their announced employee cuts. This time round even the true dinosaurs are moving to restructure ' MEI's first faltering steps (although nowhere near enough) into an early retirement plan and Toshiba handing control of its Dram operations to Infineon. This is evidence of a New Japan, where restructuring means the closure and sale of non-core assets. These steps are a direct result of the losses being seen this year. Without this crisis there would be little action.
Comments from Finance Minister Masajuro Shiokawa that Japan will 'fulfil its responsibilities' in its fiscal policy in light of the global slowdown, would seem to confirm that the ¥30 trillion debt limit will be broken.
More and better targeted spending would seem to be on the way. The market needs Koizumi to act while he maintains 70% plus popularity ratings. Action on the banking problems to create a functioning private sector system has the potential to act as a driver for the whole market.
And given valuations support, liquidity conditions and the fairly low expectations for the global economy, if the government acts positively on this issue, Topix may already have bottomed.
Restructuring of large Japanese companies.
Valuations starting to look more attractive.
Global liquidity rally set to continue.
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