there's a pessimistic perspective over at
worldlyinvestor.com
Japanese Recovery
March 19, 1999 6:32 AM EST
By Martin Crim
Special to worldlyinvestor.com
How can anybody not take heart from the Tokyo stock market's spectacular gains over the past few weeks? The Nikkei seemingly has risen from the grave amid a rush of optimism and foreign money. So is it justified?
Many analysts point to signs that the Japanese economy finally is turning the corner. As Prime Minister Keizo Obuchi suggests, it's "begun to bottom out."
Other analysts say Japan's banks finally are getting their acts together, and that many of Japanese corporate behemoths are getting down to the tough job of restructuring.
I'd really like to be wrong, but I'm afraid I'm going to have to rain on this parade.
There are several reasons why this rally probably won't hold. First, it's March, and that means window-dressing. And I don't mean for Easter.
March 31 is the end of the financial year for Japanese companies, and it's not unusual even in the worst of times - like now - for the market to put on its best face for a few weeks.
With banks facing unusual scrutiny from government regulators, the market rally will make a difference for the valuation of their decimated stock portfolios (especially those all-important cross shareholdings) if the Nikkei is substantially above the 14,000 level for April Fool's Day.
But let's assume there is more going on than just that. It's true that there has been a glimmer of hope from the economy recently.
There have been some signs that personal consumption may be picking up, especially among certain consumer durables.
And everybody knows that the government is stuffing tens of billions of dollars into public works spending. All those paved over rivers and man-made islands in Tokyo Bay have got to be filling somebody's corporate coffers!
But if the fourth quarter of 1998 is any indication of the real trend, Japan isn't getting much bang for its government buck.
GDP continued its slow-motion collapse during the last three months of the year. It shrank 3.2%, much more than most forecasters had projected.
Domestic demand was anemic, with business investment and residential spending falling off the table. Government spending was the only thing the economy had going for it.
But let's assume that Mr. Obuchi's bottom, so to speak, was hit during the current quarter. Unfortunately, the latest numbers don't do much to reinforce that assumption. Department store sales in February sank 3.4% year on year and last year certainly wasn't anything to write home about.
That's not the only ugly number. Robert Feldman of Morgan Stanley, who predicted the fourth quarter decline, says that while new car registrations rose 3.2% in January, that largely reflected a big increase in sales of new models of minicars.
Meanwhile, sales of bigger-ticket sedans fell almost 10%. He also points out that on top of record unemployment of 4.4%, the number of hours worked per person fell.
Moreover, unemployment among heads of household continued to rise. And where do all the construction workers go once the government finally realizes that it's going to be mighty hard to keep pumping out pork by piling up debt?
Those employment numbers should be a renewed warning sign for consumer sentiment and for corporate earnings.
What about the banks, who are benefiting tremendously from the Tokyo market's run-up?
Most of the big city banks are about to receive an infusion of government money, and in return they have committed to restructuring plans, including cuts in employment and branch networks.
But even if we put the brightest possible spin on this scenario, it's hard to see banks both pulling in their horns and increasing lending in any meaningful way. And new lending is exactly what bottoming-out companies, especially small and medium sized ones, need desperately.
So that leaves the corporate restructuring story. The newspapers certainly have made hay out of the announcements of cutbacks and (eventual) layoffs from the likes of Sony (quote, chart, profile) and Toshiba (quote, chart, profile).
But for every company that at least is considering biting the bullet, there are 100 that are still playing the same old shell game of shuffling redundant employees around subsidiaries.
Ken Okamura, a strategist with Dresdner Kleinwort Benson, writes, "The government's attempts to stabilize the economy run directly counter to the needs of major Japanese companies to restructure. Thus the government is guaranteeing the debts of bankrupt companies and lending to hard-pressed companies in overbuilt sectors such as retail.
"This does not bode well for a long-term recovery and also means that if companies do undertake restructuring, this will impact hopes for a recovery."
This is hardly a recipe for a continuing stock market rebound. Rather, it seems like a blueprint for short term market gains, followed by a renewed decline in share prices. |
