Koizumi's Win Lifts Stocks
Japan's Indexes Gain as Victory Augurs Well for Policy Changes
By ANDREW MORSE
Staff Reporter of THE WALL STREET JOURNAL
September 13, 2005; Page C14
TOKYO -- By winning a landslide victory in Sunday's election, Japan's ruling party has pleased a constituency other than the country's voters: investors in Japanese stocks.
Japan's key stock indexes rose strongly after Prime Minister Junichiro Koizumi and his Liberal Democratic Party won an unexpectedly large share1 of seats in a snap Lower-House contest. The victory gives Mr. Koizumi a mandate to pursue his program of smaller government and fiscal change -- measures widely seen as helping reinvigorate Japan's economy by channeling money now controlled by the government to the private sector.
Yesterday, the benchmark Nikkei 225 Stock Average rose 204.39 points, or 1.6%, to 12896.43. It was the index's biggest one-day gain since May and its highest close since June 29, 2001. The broad Topix index, which includes all of the stocks on the first section of the Tokyo Stock Exchange, rose 16.45, or 1.3%, to 1309.80 -- its highest level since June 11, 2001.
Mr. Koizumi's victory and expectations of the changes it should bring have brightened the already-rosy outlook for Japanese shares. In the wake of the results, several strategists raised their year-end targets for the stock market, saying investors who were waiting for the political drama to end will now start investing more actively.
"This is great news for Japan," said John Vail, a strategist at J.P. Morgan Securities in Tokyo, who raised his year-end target for the Topix to 1350 from 1275. "Doubts about Japan's commitment to reform have received a tremendous blow."
Mr. Koizumi's changes come as other segments of Japan restructure themselves. The long-troubled banks have written off bad debt and merged into stronger, healthier institutions, and there are signs lending finally is starting to grow again. Similarly, the country's steel industry has consolidated, cut costs and grown more efficient. And many companies that expanded beyond their main business areas during the property and stock bubble of the 1980s have sold those noncore operations to concentrate on what they do best.
Now there is increasing evidence that after years of retrenchment and slump, Japan's economy is on the brink of sustainable growth -- which will help make stocks more attractive as consumption and investment rise. Yesterday, the government said Japan's economy grew much more quickly in the April-June quarter than it had initially estimated. It raised the growth rate to 0.8% from the previous quarter, compared with last month's original growth estimate of 0.3%. The higher figure translates to a 3.3% growth rate on an annualized basis.
The government also said the current account, a broad measure of the country's trade with the rest of the world, in July had a surplus 0.8% wider than that of a year earlier. This was the first time in three months that the surplus expanded from the previous year. The corporate-goods price index also rose, in the latest sign Japan might be nearing the end of its debilitating multiyear bout of price deflation.
Investors say Mr. Koizumi deserves some of the credit for the turnaround in Japan's economy because of the dramatic actions he has taken since becoming prime minister. He has done away with a lot of wasteful government spending on politically driven projects like roads and bridges in remote locations. He also oversaw a rehabilitation of the financial system that forced major banks to write off billions of dollars in dud loans that had festered on their books since the early 1990s.
Banks, as well as other financial institutions, will be beneficiaries if Mr. Koizumi succeeds in his long-cherished goal of privatizing the country's postal system, which also serves as a savings bank and insurance company. It sits on $3 trillion in deposits and life-insurance policies, money that will almost certainly flow to traditional banks and insurers if the post office is privatized. Heavy resistance from old-guard politicians torpedoed an earlier attempt to pass privatization legislation, which prompted Mr. Koizumi to call Sunday's election. Now that his supporters have won, it looks very likely the legislation will pass, analysts say.
"A lot of money is going to go out of the post office and go to the banks when the post office is privatized," said Kirby Daley, a strategist at Société Générale Securities' Fimat unit, who raised his year-end target for the Nikkei 225 to 13500 from 13000.
Hopes that private banks will get some post-office business helped light a match under financial shares yesterday. Mizuho Financial Group gained 4.4% to close at its highest level ever of 640,000 yen ($5,828). Sumitomo Mitsui Financial Group rose 3.9% to 929,000, and Mitsubishi Securities climbed 4% to 1,060 yen.
To be sure, overhauling government policies takes time. Under Mr. Koizumi's current postal-privatization plan, it will take more than a decade to complete that process. And Japan's market and economy don't exist in a vacuum; a slowdown in the pivotal U.S. and Chinese economies could weigh on Japanese stocks.
But for the meantime, investors say the election results highlight a stock market that hasn't been this attractive in two decades. "No one had anticipated a victory of this magnitude," said John Alkire, a portfolio manager at Morgan Stanley Asset Management who has been buying and selling Japanese stocks for 25 years. "This is the final exclamation point to the Japan recovery story."
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