Investors betting on a recovery in Japanese stocks are not easily discouraged. After three short-lived rallies in the 1990s, they are again hoping that the market will finally pull itself out of its decade-long funk.
Fund managers with a mandate to invest here have some reason for quiet optimism for the new year. Many big names, like Nippon Steel and the Pioneer Corp, are trading near 10-year lows, making Japan one of the cheapest industrialized markets. Bargain-basement prices are leading to mergers and takeovers that were previously unimaginable, as evidenced by a deal that would give Roche of Switzerland a majority stake in Chugai Pharmaceutical. Waves of companies are announcing revampings, encouraging investors.
As the year turns, though, the pessimists have the upper hand. Investors, encouraged by the election of a tough-talking prime minister, Junichiro Koizumi, bid up stocks in April and May. When his reform bandwagon stalled, stocks resumed their decline, propelled by mounting banking problems, falling semiconductor prices and the events of Sept. 11. The Topix -- an index of all top-ranked companies on the Tokyo Stock Exchange -- fell 19.6 percent this year, its eighth one-year decline since 1990.
Mutual funds that invest dollars in Japan fared even worse because of the yen's 16 percent slide against the dollar. Through mid-December, these equity funds were down more than 30 percent, the largest decline of any international category, according to Morningstar, a magazine that covers the mutual fund industry.
Another bad year
As Koji Nishigaki, president of NEC, the electronics giant, said recently, "I want to forget this year as soon as possible." Unfortunately for Nishigaki, whose US$44 billion company delayed listing on the New York Stock Exchange this year, next year does not look much better.
The economy has fallen into its fourth, and perhaps deepest, recession since 1992, pushing the unemployment rate to a high and sapping consumer spending. Exports and government spending are sputtering as the US economy falters and as Koizumi tries to rein in debt. The Bank of Japan expects the economy to shrink about 1 percent both this year and next.
In recessions past, Japan ramped up exports, pumped taxpayer money into the economy and cut interest rates. With those options mostly exhausted and the banking system in shambles, investors hope that Koizumi, who wants to overhaul the tax code, deregulate crucial industries and force banks to write off bad loans, can overcome the forces allied against him.
But the prime minister will probably disappoint investors, whether he succeeds or fails. If he has his way, Japan will fall deeper into recession as deregulation and loan write-offs drive up bankruptcies. If conservatives kill Koizumi's program, investors are expected to sell stocks in the belief that lawmakers are not serious about fixing structural problems. Judging by the pace of reform in past administrations and the string of defeats that Koizumi has already suffered, the Japan bears have history on their side.
"Don't hold your breath for quick reform in Japan -- particularly of bank bad debts -- or you will both underperform and die before it," David Roche of Independent Strategy, an investment firm based in London, said in a recent report.
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