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Nikkei rise hides deeper crisis

By Neville Bennett

Friday 18th July 2003

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Since 1991 investors have been well advised to give Japanese shares a wide berth. The Nikkei index fell from 39,000 to 7800 recently, when it reached a 20-year nadir.

Given this avalanche in values, it has been unwise to invest even in good stocks such as Sony or Honda.

But to put some assets into yen may be a good play.

At a time of dollar weakness the yen has such strong appreciating tendencies that it has overcome the Japanese authorities spending $US30 billion in the past few weeks. It seems destined to appreciate despite these efforts.

What about the Nikkei? Kiwi investors have little reason to diversify into it.

After all, yields and price-earnings are good on the NZX. But the international press is highlighting a stock surge in Japan and the wealthy may feel that they are missing out.

The Nikkei recently moved from 7800 to 10,000 but this was off a 20-year low and a devastating 65% decline since 2000.

US brokers assert the Japanese government is showing a new determination to get tough on deflation.

It takes a lot of optimism to believe politicians are capable of more than rhetoric.

But if one must grasp at straws, there is a new vigorous governor of the Bank of Japan (BOJ) and three new faces on the policy board.

Some minor changes have occurred, like the extension of mortgage relief for new home buyers.

The BOJ has no freedom to influence monetary policy through easing interest rates, as the official discount rate is 0.1%. It is contemplating shaking Japan out of deflation by unorthodox tactics.

It has been reflating the sharemarket by aggressively buying shares but has given the game away by admitting the economy is "fragile."

It has no answers to the critical bad loan problem, other than hinting it might temporarily nationalise the banks to remove bad loans from their books.

A flurry in Japan stocks should not disguise the reality that the economy is close to disappearing down a black hole. Its difficulties are greater than a mere cyclical downturn.

The problem appears to be a persistent downturn in the long-term growth trend.

Since 1992 there have been a dozen "emergency" or "comprehensive" economic policy packages, which have thrust money into the economy.

These measures started as classic Keynesian demand stimulation measures.

Their principal effect was to damage almost irrevocably the government's fiscal standing: long-term debt has reached ¥700 trillion and adding more is not an option.

The Japanese have been lavish with stimulus but have shied away from serious structural reform.

Are there any bullish trends?

There is some change in the bond market. This is always a good place to start observing markets as vast sums of money are involved, and governments cannot affect long-term rates.

At the beginning of the month, the authorities were humiliated when their routine offering of 10-year bonds was treated with contempt.

The bonds were only taken up when interest rates reached 1.1%, double the going rate of 0.45% set a month ago.

It is assumed much money has flowed from the bond market into stocks.

Nevertheless, it is foreigners who are driving the market.

They have been net buyers for 12 straight weeks, spending ¥2 trillion in June alone.

This has created a more ebullient feeling.

The latest Tankan survey was surprisingly bullish and capital investment has been growing significantly.

The Nikkei tends to track the Dow Jones (see graph) and it will thrive as long as the Dow Jones does.

Perhaps the Nikkei has bottomed and is poised to grow. But it will need good weather, for the recovery, if that is what it is, does not have the resilience to cope with crises.

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