The Japanese market has fallen, led by technology shares, reflecting the decline in Nasdaq. Risks re...
The Japanese market has fallen, led by technology shares, reflecting the decline in Nasdaq. Risks remain, but, assuming steady economic growth, a continuing recovery of profits and an absence of major shocks, the index could recover in the coming year.
Economic indicators point to moderate expansion at best. On the positive side, although the rate of increase has probably peaked, industrial production should continue to expand, led by technology. Consumption could also recover gradually over the coming year.
Companies remain under pressure to cut costs, but helped by higher production, the unemployment rate and stable wages, job offers are increasing and summer bonuses are expected to rise for the first time in three years. Consumer sentiment has improved and the maturity of postal savings may boost spending independently of income trends.
Capital investment, especially that related to information technology, remains the area with the best prospects for growth and the chief driver of the economy. For the coming year, growth of 1.0-1.5% looks possible.
The main risk to the economic scenario is that domestic private demand will be inadequate to counter the effects of a slowing world economy and fading fiscal measures. Problems are compounded by persistent deflation. Higher global commodity prices are pushing up domestic wholesale prices, but consumer prices are falling at an accelerating rate, squeezing profits. The number of bankruptcies is already close to the levels seen in 1998 and could rise as borrowers start repaying loans guaranteed by the government, which account for 10% of private credit outstanding.
If interest rates were to be raised, as Bank of Japan governor Hayami has hinted, pressure on the highly indebted small company sector would increase further.
Corporate profits are improving. Consolidated recurring profit grew by 27% in the year to March 2000. The figure was better than expected, but there was a boost from stock sales to fund pension write-offs.
Doubts remain about the will of companies to restructure now that business has improved, but recent legislation on corporate spin-offs may help and, given top line growth, the targets seem attainable.
Risks in the Japanese market include susceptibility to US selling, a possible cyclical downturn, disappointment with policy, lack of structural reforms at national and corporate level and renewed financial or fiscal crisis.
However, Japanese companies have retained leadership in many technological growth areas and valuations have become more reasonable.
Ample domestic cash is available for stocks if sentiment improves.
Steven Wheeler is a fund manager at Rothschild Asset Management
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