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To: StanX Long who wrote (58345)	1/2/2002 10:55:22 PM
From: StanX Long	Read Replies (1) \| Respond to of 70976

Predicting Tokyo's path becomes a gamble By Bayan Rahman in Tokyo Published: January 2 2002 17:41 \| Last Updated: January 2 2002 17:43 markets.ft.com At the start of 2001, many analysts were predicting a recovery in the Japanese stock market after its sharp slide the previous year. In 2000, the Nikkei 225 Average had plunged more than 27 per cent to 13,785, its worst performance in 10 years. However, even the most gloomy forecasts did not expect the stock average to fall below 12,000 in 2001. But by December 28, the last trading day of the year, the benchmark Nikkei was down almost 24 per cent on the year at 10,542.62, having picked up from a mid-September trough of 9,504.41. Last year proved to be full of surprises, both pleasant and not, as a result of which predictions for this year are more cautious. The Nikkei's fall to below 10,000 for the first time since 1984 was a serious psychological blow for the market, particularly as there had been hopes that Japan's vast pool of savings would be poured into the market. The second unexpected event was the decline of Japan's economy into what looks like a deep recession that will continue well into this year. The stock average fell below 10,000 on September 12, the day after the terrorist attacks in the US shook the world's stock markets. Although Japanese stocks, along with other markets, have rebounded, the economic impact of the attacks and strikes on Afghanistan continue to dog Japanese stocks. One pleasant surprise in 2001 was the emergence of Junichiro Koizumi as prime minister in April. Few would have predicted that Japan would find itself headed by a leader who promised that "no sacred cows" would get in the way of economic structural reform. Masatoshi Kikuchi, senior strategist at Merrill Lynch, said: "The arrival of the Koizumi government was unexpected and a big event for the stock market. Structural reform is a big issue for investors but the market is very disappointed." The past decade of economic stagnation and limited progress on reform have led some observers to hope that Japan will face a crisis in 2002 that will force macro level reforms. Kathy Matsui, chief strategist at Goldman Sachs, says the most urgent issue on the reform agenda is solving the root cause of the banks' bad debts and deflation. This would involve the rationalisation of inefficient industries, deregulation to increase competitiveness in industries such as real estate and healthcare, reallocation of capital and labour to higher growth sectors and tax reform, she says. "Above all the market would like to see the government tackle these structural problems with a greater degree of urgency," Ms Matsui notes. "While there may be some progress during 2002, we believe there is a risk that the content and pace of reforms will continue to fall short of expectations." On a micro level, analysts expect deflation, weak domestic demand and increasing competition from cheaper imports to force consolidation and restructuring on Japanese companies. Many market analysts are advising investors to avoid the bank sector and domestic-demand led issues, such as machinery makers which have been hit by a decline in capital expenditure, because of the weak economy. Several bank shares have fallen to 17-year lows recently but some analysts warn there may be worse to come as bankruptcies are expected to increase. Mr Kikuchi believes export oriented shares are likely to do better than domestic-demand led shares. He expects the Nikkei 225 to trade in a narrow range in the first half and to rise to 13,000 by the end of 2002, while Ms Matsui expects the Topix index, currently a t 994, to trade between 900 and 1,200. print article