On a positive note, as of September 24th the Tokyo stockmarket had fallen much less than most other stockmarkets - both during September and in the year-to-date. The MSCI Japan index, measured in dollars, is only down 7% this year while the MSCI World is down 27%.
Investor sentiment
Considering the amount of bad news coming out of Japan this outperformance might seem illogical. Yet there is a background of extremely negative sentiment since the beginning of 2002.
Investors feared a financial collapse at the end of the fiscal year on March 31st. When this was averted many investors, underwei
ght in the region, probably predicted that future bad news would be limited.
Still the bad news that emerged in September should make investors have second thoughts. Most alarming is the surprise announcement last week by the Bank of Japan that it will start buying shares directly from distressed banks.
It is a move that outside experts consider “ineffective” (Morgan Stanley) and even “bizarre” (Smithers & Co). Added to this came the first-ever failure to fill the auction for Japanese government 10-year bonds on September 20th.
Meanwhile, as long as the lack of economic reforms continues statistics showing a slow economic recovery will not be enough to encourage the stockmarket.
In over a year as prime minister Junichiro Koizumi has not met the promises for reform he made when he was elected. Adding to the gloom is the risk of an American attack on Iraq which would probably disrupt Japan’s oil supply.
Outlook
A substantial piece of good news is needed to revive the Japanese stockmarket. But the political deadlock and the weakness of the financial system seem insurmountable so the probability that Mr Koizumi will at last deliver his promised reforms looks small.
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