Is Tokyo Set to Rise?
Optimism Despite a Meek '06
By ANDREW MORSE
January 3, 2007; Page C5
Japan's stock market disappointed investors hoping for a big rally in 2006, as it struggled to post a 6.9% rise for the year. But strategists are cautiously optimistic that conditions are still in place to push Japanese shares higher this year.
Rattled by concerns over a slowing global economy that caused the country's listed companies to issue restrained earnings guidance, many investors grew weary of Japanese stocks in 2006. The tepid rise in the benchmark Nikkei Stock Average of 225 companies was a letdown for investors recalling its 40% jump in 2005. It also stood in contrast to the performance of the Dow Jones Industrial Average, which rose 16% last year. (Tokyo trading remains closed today; the market reopens tomorrow.)
Worries about growth haven't disappeared, but they are starting to fade a little. While the U.S. isn't growing as fast as it had been, the world's largest economy is continuing to expand. So are other key destinations for Japanese exports, like China and Europe.
The Japanese economy, too, has showed resilience as its recovery from 15 years of slow or no growth continues. Expectations mount that consumers here, long careful with their money, will finally begin to loosen their purse strings.
Corporate Japan is feeling more robust, too, after a season of better-than-expected earnings: companies reported pretax profits rose 11.7% in the first half, 6.5 percentage points more than the average forecast, according to Goldman Sachs Group.
The stream of positive news has a growing number of strategists calling for a modest, controlled rise in Japanese stocks that could give the market a fifth-consecutive year of gains.
They think earnings forecasts, calculated as worries about a global slowdown hit a peak, may be overly negative. Many also agree consumers will fuel economic activity. Lastly, changing attitudes among individual investors will likely drive more money toward the stock market, they say.
"We continue to believe there is massive potential" for Japanese shares, Kathy Matsui, Japan strategist at the Tokyo office of Goldman Sachs, said in a report in late 2006. Ms. Matsui says earnings will likely rise in fiscal 2007, which ends March 31, 2008, marking a sixth-consecutive year of earnings growth in Japan.
Ms. Matsui says a combination of more revenue and streamlined companies suggests net profits in Japan will rise 13% in fiscal 2007 -- stronger than the consensus estimate of a 10.8% gain. She reckons that rise could push the Topix index, composed of all shares listed on the First Section of the Tokyo Stock Exchange, to 1800 by the end of 2007.
That would be a 7.1% rise from its 2006 close of 1681.07 and much stronger than the past year's gain of 1.9%. (Ms. Matsui, like most strategists in Japan, forecasts the Topix because it is broader and more representative of the share market than the better-known Nikkei average.)
One question for Japan's economy is whether better corporate performance will translate into stronger consumer spending. Shoji Hirakawa, a strategist in Tokyo for UBS, says it will. Until now, Japanese corporations were mindful of the excessive spending that hurt their performances during the 1990s, and they kept a tight rein on wages. But they have started to feel better about their prospects, says Mr. Hirakawa, and he expects them to raise wages, giving workers more spending power.
He also expects a rise in spending as a big number of Japan's baby boomers reach age 60 this year and retire. Japan's baby boom "generation" -- much more concentrated than America's -- is largely made up of people born between 1947 and 1949. Eight million people will retire over the next three years, and many will receive big lump-sum payments from the pension system. While much of that will go into investment and bank accounts, Mr. Hirakawa thinks the country's hard-working salarymen and women might splurge a little, creating a surge in consumer sales. He thinks the spending could push Japan's economy two percentage points higher.
Mr. Hirakawa also sees the Topix rising to 1800 over the course of the year.
Not everyone is convinced the stock market will rise. Jonathan Allum, a strategist at KBC Financial Products, frets that the economy remains fragile. He worries that the Bank of Japan, anxious to demonstrate its independence, might raise rates unnecessarily this year. "I'm not terribly optimistic," he says. Mr. Allum sees foreign investors lowering their risks in Japan, something that will push the Topix down to 1550 in 2007.
But the optimists see stocks getting a lift from a relatively new set of investors: Japanese individuals. Net assets in stock-investment trusts -- similar to U.S. mutual funds and a favorite way for individuals to invest -- stand at 50 trillion yen ($420 billion). That is 25% more than their roughly 40 trillion in assets in 2005, according to the Investment Trusts Association.
Much of that money is coming into the market through defined-contribution pension plans similar to 401(k) plans in the U.S. Since these were introduced in 2001, more than two million Japanese have entered into them and invested more than 2.5 trillion yen. While the amount is much smaller than comparable U.S. contributions, it is increasing.
Wider availability of investment trusts also has helped individuals get into the market. In 1999, commercial banks started selling investment trusts, increasing their popularity. In 2005, Japan's post office, which also doubles as a gigantic savings bank, began selling them. Some 1,155 post offices handle investment trusts.
"Most Japanese investors have finally become comfortable that the economy has truly exited its 'lost decade,' " John Vail, a strategist at Nikko Asset Management, wrote in a mid-December report on the emergence of Japan's equity culture. They now see stocks, he said, as "a good way to invest in this growth."
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