Japan Stocks Close at Highest Level in Almost Two Years
The Japanese stock market is in a steep climb, and there might actually be good reason for it.
Despite all the country’s woes and skepticism about its claims of progress, analysts say the market is responding to an accumulation of hopeful economic indicators, signs of true corporate restructuring and indications that Japan may be collecting dividends from Asia’s early economic recovery. And surging stock prices themselves could further fuel the process by bolstering Japan’s beleaguered banks.
On Thursday, following quickly on the heels of last week’s unexpectedly strong economic growth report, Japanese stocks staged their strongest close in almost two years.
The benchmark Nikkei average closed at 17,470.45 on Thursday, up 260.27 points, or 1.51%, its highest since the 17,687.61 close on Oct. 27, 1997. This was an important psychological barrier, traders said, because the market had tried repeatedly to break the 17,300 level without success.
The results coincided with a strong showing by other Asian stock markets, partly responding to good news on U.S. inflation, as Indonesia soared 2.9%, Taiwan 2.7%, Thailand 2.1%, Hong Kong 1.9% and the Philippines 1.1%. Markets in Singapore and South Korea rose fractionally.
To be sure, Japan still has enormous problems with its wobbly banks, shaky insurers, overbuilt factories and often tangled policymaking process that will take years to work out. Furthermore, Japan has fooled the world before with a number of false dawns.
Still, investors seem increasingly willing to believe the sake cup is half full as they ignore bad news and focus on some signs that Japan’s long slide has abated.
“Japan seems to be getting back on the path to recovery,” said Ikuya Matsuo, head of trading with Sakura Securities Co.
The most dramatic change in the statistical landscape was the 1.9% gain in gross domestic product posted last week for the January-March quarter, after 15 consecutive months of shrinkage.
Most private economists, and even many bureaucrats, expressed skepticism that this strength will carry into the current quarter, or even that the numbers are completely reliable.
“But it gives cause for hope. . . . We think it’s possibly a turning point,” said Ayaz Ebrahim, Hong Kong-based chief investment officer with Indocam Investment Asset Management.
Fund managers also acknowledge privately that they would look bad if Japanese equities took off and they missed the ride, given the enormous size of the Japanese stock market.
So even a questionable sign of real economic progress is bringing money into the Japanese market, and a second quarter of growth could bring a torrent--and potentially spur consumer and business confidence in its wake.
“In the longer term, foreign capital seems to be coming back into Asian markets, including Japan,” said trader Matsuo.
Some analysts are now predicting the market could hit 20,000 by year-end.
Furthermore, for those intent on seeing fireflies in the gloom, several other indicators appear to have stopped declining, even if they are not yet positive. Industrial production, for instance, could turn positive by year-end, some believe, while inventories are also declining reasonably quickly. The Bank of Japan’s easier monetary policy also has received good marks.
A second cause for limited optimism is growing evidence that companies are beginning to cut costs after almost a decade of denying the need. “There’s been a more or less consistent drip-feed of restructuring recently,” said Russell Jones, chief economist with Lehman Bros. Japan.
HSBC Securities Asia reckons that some 121 of the 250 biggest Japanese companies it follows--the likes of Sony, NEC and NTT--have announced restructuring plans that would ultimately cut about 14.1% of the parent companies’ work force, or 162,000 people, over the next two years.
Japan also is talking about adopting a consolidated accounting system. It currently reports only parent company results, a system that allows companies to hide huge problems in their subsidiaries. This could give investors a clearer picture of problems.
Investors also are encouraged that Britain’s Cable & Wireless was allowed to acquire Japanese telecommunication provider International Digital Communications Inc. by outbidding hometown giant NTT last week.
The deal was about as close to a hostile takeover as Japan has seen. In the past, acquisitions were quietly decided, generally behind closed doors, with heavy influence from bureaucrats.
If the market continues to rise, it could also produce some direct dividends for Japan. Banks will find themselves able to lend more because rising stock values improve their capital ratios. And companies can use proceeds from the sale of their holdings to speed up turnaround efforts.
A third factor in Japan’s recent stock market rise may be Asia’s early economic progress. Stronger economic momentum from Indonesia to South Korea means Japan’s exports to the region could recover as well.
In the end, the hope is that Japan, in its own pokey way, is finally following the example set by South Korea and Thailand, where leaders moved quickly to recapitalize banks, restructure companies, reduce overcapacity and sell nonperforming loans.
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Etsuko Kawase in The Times Tokyo bureau contributed to this report.
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Is This Time For Real?
The Japanese stock market has rallied several times since crashing in 1990-1991, but none of the rallies has stuck. Still, the market’s latest gains are spurring hope of a sustained revival. Quarterly closes and latest for the Nikkei-225 index:
Thursday: 17,470.45
Source: Bloomberg News
