-- The last time foreign investors spent more than $30 billion on Japanese stocks, the
Nikkei 225 peaked and fell 43 percent in two years.
That was the first six months of 1996. So far in 1999,
foreigners pumped $48 billion into Japanese shares, the benchmark
stock average is up 29 percent and investors are confident
history won't repeat itself according to a Bloomberg.
Just like three years ago, the rally was sparked by company
promises to cut costs and a spurt of government spending. Yet
this time around, investors say, there are differences that
should keep stocks rising.
Companies such as Mitsubishi Oil Co. and Nissan Motor Co.
are giving ground in previously taboo areas such as ownership.
And the government is investing money in viable banks, not just
public works, making it easier for companies to get loans.
``A lot of the lessons of the past have been learned,' said
Clifford Shaw, president of Merrill Lynch Mercury Asset
Management Japan Co., which manages $20 billion for Japanese
clients. ``The corporate sector finally seems to realize that
restructuring is necessary on a significant scale.'
Merrill Lynch & Co. in June raised its recommended holding
of Japanese equities in a global portfolio to 13.75 percent, up
from 11.64 percent.
For some investors though, the lesson of three years back is
to wait for more proof before buying. Domestic institutions, for
example, sold 2.3 trillion yen more of stocks than they bought in
the year through June. They've continued to be net sellers since,
helping pull the Nikkei down from its peak of 18,532.58 on July
19 to yesterday's close of 17,826.03.
Deja Vu
There have been false dawns before for Japan.
Between June 1995 and July 1996, the Nikkei rose 54 percent
to a high of 22,666. As the market rose and the economy grew 2.9
percent in the first quarter of 1996, the government cut spending
and companies reneged on plans to cut costs -- assuming a
recovery was in place.
Cosmo Oil Co., Japan's No. 3 oil refiner, promised in 1996
to slash costs by 50 billion yen ($435 million) over three years.
Instead, costs rose 11.2 billion yen in the following fiscal year
ended March.
The government also lost its way. It raised the consumption
tax to 5 percent from 3 percent on April 1, 1997, shattering
consumer confidence and plunging the economy into its worst
recession since World War II.
Three years later, many more companies are promising change.
About 535 companies announced some form of restructuring this
year, compared with 48 in the second half of last year, according
to Merrill Lynch.
This time, companies aren't just vowing to lower costs.
They're also trimming production by cooperating with rivals. NEC
Corp. agreed to work with Hitachi Ltd. in developing next-
generation computer memory chips. Japan's largest oil refiner,
Nippon Oil Co., bought Mitsubishi Oil to cut overlapping
businesses.
Cost-Killer
Some companies are even willing to surrender some control to
foreign rivals. Nissan Motor, Japan's second-largest automaker,
sold a 37 percent stake to French carmaker Renault SA. Among the
three new executives on its board is Carlos Ghosn, nicknamed ``Le
Cost-Killer' for his role in bringing Renault back to profit.
``There is a chance that real change is happening at the
corporate level and companies are starting to focus on profit,'
said Garry Evans, strategist at HSBC Securities Japan Ltd. HSBC
in June raised its recommended holding of Japanese stocks for
global investors to 15 percent from 12.9 percent.
The government's approach is also more aggressive. It spent
a total of 40 trillion yen on economic stimulus packages last
year, almost two-thirds of the total amount spent between 1992
and 1996. It also earmarked 60 trillion yen to give viable banks
money to write off bad loans, while shutting insolvent banks
including Nippon Credit Bank Ltd.
This time, the rally is ``a reaction to a reduction of the
credit risk,' said Erol Emed, senior fund manager at SG Yamaichi
Asset Management Co.'s investment planning department.
Skepticism
In order for more wary domestic investors to join the rally,
they'll need to see further proof of a recovery in next month's
release of second-quarter gross domestic product and first-half
earnings reports due in November.
``We'll be very disappointed if companies haven't been
cutting costs as much as we expect,' said Yasuhiko Sato, a
manager at Asahi Mutual Life Insurance Co.'s equity investment
department, which handles 1 trillion yen of stocks. He's been
focusing on Internet-related companies and specialist retailers.
Kathy Matsui, chief strategist at Goldman Sachs Japan Ltd.,
says companies are unlikely to reach the targets they've set,
given their track records.
Non-finance companies on the Tokyo Exchange are forecasting
profits for the fiscal year ended next March based on a 4.3
percent decline in sales, general and administrative costs, she
said. Yet such costs fell only twice in the last ten years: once
by 0.8 percent in fiscal 1993, and the second time by 0.7 percent
in the past fiscal year.
Japan's economic recovery also looks shaky. While GDP rose 2
percent in the first quarter, expanding for the first time in six
quarters, much of the improvement was driven by higher-than-
expected growth in sales of small cars. That growth, though, was
calculated based on numbers, rather than the value, of cars sold.
All this makes it even more important that the government,
facing record unemployment and a lower-house election before next
October, doesn't ease up on tough reforms again at the first sign
of recovery.
``This government doesn't make the same naive mistakes it
did in the past,' said Shaw of Merrill Lynch. ``But if
politicians lose sight of the ball at this stage, it would be a
tragic error.' |
