Investors in Japan are still waiting for signs the government will implement the structural reforms ...
Investors in Japan are still waiting for signs the government will implement the structural reforms as promised before the election.
Simon Somerville, head of Japanese equities at Cazanove, says: 'In terms of the economy, it is weakening quite dramatically at the moment. This has been led by the export sector.'
The economy is close to being in a recession and the equity markets are performing negatively.
'Another driver of the markets has been the Koizumi government and the expectation he would implement the reforms outlined in his election campaign. As yet, there has been no detail of the reform package, any announcements have been delayed until after 29 July 2001,' adds Somerville.
Merrill Lynch Investment Managers are cautiously optimistic on the prospect of structural reform in Japan.
Mark Desmidt, fund manager of the Mercury Selected Trust Japan at Merrill Lynch Investment Managers, says: 'Since his election, Koizumi has retained a high level of public approval while pursuing an agenda which promises the kind of reforms that foreign investors have sought for many years.'
But there are some potential downsides to the restructuring. Desmidt explains the reforms many consider necessary for the long-term economic recovery of Japan are potentially painful, especially to influential factions within the economy, such as farming, construction companies and banks.
'We are cautious on areas exposed primarily to the domestic economy, on the expectation that 2001 economic growth for Japan is likely to be revised downwards,' he adds.
However, not all domestically-focused companies are performing badly. Desmidt recommends companies in the utilities sector: 'We are seeing an increased focus on shareholder value and cost cutting,' he says.
Somerville also does not believe it is all bad. He explains that there is a positive side to the market and it is relatively cheap on a historical and global level.
He recommends car manufacturer Mitsubishi, and rail operator JR East because both are restructuring and undertaking aggressive cost-cutting measures. Somerville believes companies with restructuring programs tend to do better.
In addition, non-manufacturing stocks are outperforming manufacturing equities as they have been beneficiaries of outsourcing by companies trying to cut costs. Manufacturers have been suffering because of the poor export environment.
Fund manager comment: Aberdeen
The current state of affairs surrounding Japan's economy presents a dichotomy between huge grass roots support for the new leadership of Junichiro Koizumi, and continued weak data on the economic front. The change of power at the top did trigger a euphoric reaction in the equity markets initially.
Last week, Koizumi unveiled his grand economic blueprint. The plan included a proposal for banks to transfer more categories of bad loans to the Resolution and Collection Corporation (RCC), an institution set up to dispose of non- performing loans. If passed, this plan could accelerate the process of banks getting rid of their non-performing loans.
Will the plan work? Perhaps. Previous governments have experimented unsuccessfully with pump-priming activities, and lavish government spending on projects that were peripheral to keeping the economy afloat. This fiscal overdependence, coupled with a reluctance to experiment with radical measures including making the Bank of Japan buy back bonds from the commercial sector, has kept Japan's recalcitrant banking sector in the doldrums.
The situation at the corporate level looks far more promising. Companies have embraced the reform process in a positive manner by looking at ways to lower their operating costs and reward shareholders. Nissan Motors has led by example on this front, and this has inspired other firms like Aiwa and Matsushita Electric.
While this is a positive start, the litmus test will be to see whether the reduced operating costs can translate into growth in top-line sales, especially against the backdrop of weak consumption and continued deflation. Even at current stock price levels, however, there are plenty of opportunities for investors to cherry pick from.
Shahreza Yusof is investment director at Aberdeen Asset Management Asia
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