Bulls and Bears in Japan by MG analyst Andy Kashdan
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The recent run in the Nikkei has many fund managers proclaiming the recovery in Japan and its stock market this year. Besides the simple momentum players, there are some actual reasons for the bullishness. Japan seems to be finally getting serious about its banking problem, injecting large amounts of money into banks in order to write off bad loans and forcing restructuring. The Bank of Japan is starting to realize that inflation is not the main concern right now, and has been flooding the market with funds. Japanese officials have indicated that a weaker yen is in their best interest. And government spending is starting to show up in some economic indicators.
But there are reasons to be less optimistic. The amount of funds to be injected into the banks will not be nearly enough- even Japanese officials have admitted that. The Bank of Japan is still being as conservative as possible about its monetary policy. Whether the current plans for restructuring of banks and other companies will be enough has yet to be seen. And perhaps most importantly, what will happen when the effects of the government stimulus run out, and all that's left is a huge bill? Besides these factors, it is probably not a coincidence that the recent rally is occurring just before the end of the fiscal year. At that time, companies have to write down losses on shares that are worth less than a year ago. After the fiscal year ends, there may be a lot of selling to do. Since 1995, the Nikkei has finished lower at the end of the year compared to its level at the end of March.
Another troubling development was described in The Wall Street Journal today. It reports that as foreign investors are pouring money into Japanese stocks, domestic investors have been selling. Yesterday that selling overwhelmed the foreign buyers. This is bad news for any hopes of a bull market in Japan. We have seen this pattern in years past, where rallies were not sustained. According to Tokyo stock exchange data, all types of Japanese investors have been net sellers (including individuals, banks, life insurers and companies) while the only net buyers have been overseas investors. US fund managers are saying that this time is different. Japanese investors say they've seen it all before. Someone is going to be wrong.
-March 18, 1999
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