The short-term outlook for Japan is dismal while Prime Minister Koizumi carries out damaging but nec...
The short-term outlook for Japan is dismal while Prime Minister Koizumi carries out damaging but necessary reforms.
Lesley Lathe, fund manager at the Japanese desk at GAM, says: 'In Japan there are pretty poor economic indicators and a lot of weaknesses in the economy. The reforms of Koizumi are going to be painful for the economy.'
She expects the construction industry to be hurt the most by the Koizumi reforms as it receives a lot of support from the government, which will stop when the reforms are implemented. She expects 5-10% job fallout in this sector.
Nonetheless, she is increasing her weighting in construction as she expects the larger listed companies to flourish from the shake out of the smaller companies.
Tony Roberts, fund manager Japanese equities at Invesco, says: 'The economic cycle is in a downturn, the first quarter was negative and we expect GDP growth figures for the second quarter to be negative as well.
'The Prime Minister has pushed ahead with restructuring and is privatising a lot of public corporations. Although this is good in the medium term, in the short term it is not so good.'
However, Roberts expects that the government will introduce a supplementary package to help these industries if Japan has another quarter of negative GDP results.
Roberts explains the Koizumi changes are a continuation of what has been happening over the last three years. Since 1998, a lot of companies have been coming up with restructuring plans.
Presently, Invesco is overweight in steel as it is an area where companies are doing a lot of restructuring. Roberts favours general trading company Nissho Iwai as he expects it to be rated upwards by Moody's as the company is selling off large parts of its business.
GAM is overweight non- banks as it expects these types of companies will be helped by the Bank of Japan easing monetary policy.
Taylor says Japan has to sort out its banking sector. It is possible the Bank of Japan could put more money into the banking system to spur the economy. However, he is not sure when this is likely to happen.
Lathe explains ultimately the Koizumi reforms hope to help the banking sector and turn it into something viable.
Fund manager comment: CrÃ©dit Agricole
In July, Topix plunged to its second lowest level since 1990. The main reason was a strengthening consensus that the economy was heading for recession due to weakness in external and domestic demand, caused by declining IT-related exports and deteriorating domestic consumption.
As Japan prepared to vote in the Upper House elections, the government did not come up with any concrete measures to combat deflation. This delay, while unavoidable, contributed to a very poor sentiment as investors saw no light at the end of the tunnel at macro or micro level. If anything, corporate earnings continued to surprise on the downside. From the funds flow point of view, foreign investors were on the sidelines, waiting for the government to take concrete policy actions before committing further.
In July, communications and electronics/electric machinery names plunged further on more fears of profit collapse. The banking sector was hit heavily on renewed concerns that the stock market plunge would lead to financial instability. On the other hand, relatively low-beta stocks in warehousing, transportation, and insurance sectors performed relatively well along with foods and utilities.
The outlook for the market heavily depends on what exactly PM Koizumi will do to prop up the economy and implement reforms. He is in a strong position and can force a general election should his opponents raise their heads.
We need to watch if public funds will be used to re-capitalise banks, which mark to market their stock holdings from this September. There should be some action centering on tax reduction to rejuvenate the market.
Akio Kitamura is chief investment officer at CrÃ©dit Agricole Asset Management, Japan
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