Passersby look at a stock index board as they are reflected in the display window outside of a brokerage in Tokyo July 1, 2010.ISSEI KATO
There are worse places to have invested over the past 10 years than the Japanese stock market, but not many. To this day, some top global portfolio managers still can't bring themselves to put clients' money into the Tokyo Stock Exchange.
The benchmark Nikkei 225 index is down almost 20 per cent over the last five years, and more than 40 per cent during the decade. A generation of traders have never known positive market sentiment for Japan. Could that be about to change?
"We think brighter times lie ahead," said John Higgins, senior markets economist with London-based Capital Economics Ltd. He is forecasting that the Nikkei will outrun New York's S&P 500 for the remainder of the year. Specifically, he's calling for Japanese stocks to rise about 6 per cent from today's levels, compared with a slide of nearly 3 per cent for the S&P 500.
Mr. Higgins lists three reasons why he is "cautiously upbeat" for Japan's downtrodden market. In a report this week he calculated that the country's GDP could grow by 4 per cent this year, while at the same time fiscal policy is becoming more conducive to growth. "Over the last decade, Japan's stock market has generally tended to do quite well when the economy has grown," he wrote.
The second reason is that Japan's currency is likely to weaken gradually. The yen is trading at a 15-year high to the U.S. dollar, spurred by investors seeking an alternative haven to the greenback and gold. Mr. Higgins expects a 9-per-cent decline in the yen against the dollar by the end of the year and a further decline through 2011, as traders gain greater confidence in the global recovery. "Over the past five years equities in Japan have generally strengthened when the yen has done the opposite," he noted.
STOCKS REASONABLY VALUED
The third reason for his bullishness is that he considers Japanese stocks to be reasonably valued compared with historic standards. Valuations were notoriously high compared with North American prices in the lead up to Japan's market crash at the start of the decade.
Other forces are at play, however, that could spoil this upbeat market scenario. One of the chief concerns for Japan right now is that a strong yen could actually choke off the recovery. Measured against a basket of trading-partner currencies, the yen has surged by nearly 30 per cent during the past three years, notes David Cohen, director of Asian economic forecasting at Action Economics in Singapore. While deflationary forces in Japan have helped to improve the competitiveness of the country's exporters, the strong yen is slowing the export-driven rebound in Japanese manufacturing, even as other Asian exporters grow stronger.
"Higher local currency threatens to erode the value of earnings of exporters, and investor concern is reflected in the strongly negative correlation observed between the [foreign exchange]rate and stock market prices," he wrote in a report published this week.
Mr. Cohen said the critical mark will be if, and when, the U.S. dollar falls to ¥85, at which point Japan's central bank would come under pressure to intervene to resist further appreciation of the yen. Japanese authorities haven't stepped in to counter a rising yen since 2004. Although the Group of 20 advocates that its members allow flexibility in their currencies, Mr. Cohen note that Japan's finance minister has already offered "verbal intervention," saying the government wants to avoid excessive gains in the yen.
|
An Investor's Guide to Understanding the Economy by Gary Rabbior:
|
Cat:e528746c-3414-401a-b14b-50247e3bdf01Forum:d0fa4e14-88d2-41f9-8a19-896bdff9544b