Despite the recent hike in the short term money rate by the Bank of Japan and weak stock markets at ...
Despite the recent hike in the short term money rate by the Bank of Japan and weak stock markets at the end of February, the long term outlook for the Tokyo market looks positive on the back of exports remaining strong, consumer spending rising and the economy expanding.
The Bank of Japan raised the short term money rate by 0.25 to 0.5% in January, but this seem to have had little impact on long term rates, with the bell weather 10-year Government bond continuing to trade at around 1.7%. We would expect the Bank of Japan to raise the rate one or two more times this calendar year and, therefore, see short term rates ending the year at somewhere around 0.75 to 1%.
The Bank of Japan will, of course, be looking at inflation, economic activity, the real estate market, GDP growth, industrial production, unemployment and the yen/dollar rate when considering future interest rate hikes. However, we think the recent rise will have little or no impact on the trend of the economy and corporate earnings and we believe the fundamentals of the economy are growing stronger.
Inflation is not a problem and, for the year ending March 2007, most economists predict inflation of only 0.1 to 0.3%, some even less.
Partly due to a change in the timing of the Chinese New Year, exports were very strong in January, jumping around 18.9%. Exports, along with domestic capital investments remain the main locomotives of growth, at least for the time being.
Hopefully, some type of recovery in consumer spending will begin to kick in by the summer. In fact, the consumer index has been slowly improving, moving from around 45.9% in December to a little over 48% for January. However, the monthly economic data is still very mixed. For example, auto sales are down and so are supermarket store sales, but fast food sales are up. For the current fiscal year ending this March, we continue to expect GDP growth in real terms to reach something around 2% and, for the next fiscal year ending March 2008, about 2.25% to 2.5%.
We also remain optimistic on the outlook for the corporate earnings and continue to expect double-digit growth for the fiscal year ending March 2008. We think that the operating environment is now favourable or slowly becoming favourable and this will help lead to higher GDP growth and improvements in profit margins which should help push up earnings. We expect recovery in consumer spending to play an major part in next fiscal year's earnings growth.
In terms of the markets, we have been encouraged by the recent change in market sentiment. Trading volume has been good and trading value had exceeded 3 trillion yen on most days. We think this is a good sign. Also, Tokyo Second Market trading volume has exceeded 100 million shares on some days, another good sign in our opinion.
We have stressed in the past, the buyers and sellers seem to be delicately balanced but recently on many days buyers have outnumbered sellers resulting in higher stock prices, especially for some sectors and specific stocks. Investor confidence seems to be slowly recovering and this is, of course, good for the trend in the market. However, we would stress that recovery is still very fragile and could very easily slide into profit taking, especially if there is unfavourable news.
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