japan may experience a short-term lift through government reform pressures, but its future remains uncertain
The Japanese market is set for a 30% bounce in the next month which could see the end of the bear market, according to Rod Birkett, co-manager of Thames River Capital's new Japan products.
The catalyst is likely to be the bankruptcy of a large borrower such as Asahi Life, brought about by banking reform pressures from the country's new finance minister Heizo Takenaka.
The expectation of unwinding of equity holdings caused by this will affect the market, but whether it will prove to be the end of the bear market depends on how the situation pans out, according to Birkett.
'The medium term depends on uncertain factors,' he said.
In the long term, the only scenario that can prevail in Japan is banking and corporate reform followed by economic and market improvement, according to Huw Llewellyn, who co-manages funds with Birkett.
Corporate complacency and an inadequate focus on the interests of shareholders have been the story in Japan for a long time, he said.
Managers have been protected from the consequences of bad management and there has been a tendency to build up capacity, which has led to deflation.
There are different possible scenarios for the direction Japan could take in the medium term, he said. The first sees downward re-pricing of assets, creating a major problem in the financial system, which in turn will effect non-financial sectors, causing an erosion of the government's tax base.
In this case there would likely be capital flight out of Japan, more weakness in Japanese equities and a situation comparable to the Asian crisis of 1998.
The worst scenario would be for the government to inject money without insisting on change.
In Llewellyn's opinion, the end scenario for Japan ' because it is the only sustainable one ' is for reform to take place in the banking and corporate sectors leading to economic improvement and rising markets.
This process is already taking place. Banks are being forced to alter unsustainable lending policies by Japan's new finance minister Takenaka, and pressure on bank managers from employees has also begun to mount, according to Llewellyn.
'Lending money in Japan has not been an objective assessment of borrowers' ability to repay ' Takenaka has changed this,' he said.
There is also a gradual change of attitude in the corporate sector that is leading to cost cutting and restructuring.
'There is a lot of fat in Japanese companies that needs to be cut out, but the snowball has started rolling and is gaining momentum,' said Llewellyn.
'Capacity for change in Japan makes it appealing in the long term. It is the only developed economy where we can expect profits to go up three to four times.'
As a result of cost-cutting, corporate Japan has seen an increase in cash flow, which firms are using to buy back debt and shares.
There is also growing appetite for reform among the general public. In recent Japanese by-elections, many candidates stood on a platform of reform and there is general support for prime minister Junichiro Koizumi's reform process, said Llewellyn.
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