Part of the recent decline is the result of a falling dollar - late last year there were ¥135 to the dollar but last week the exchange rate was briefly below ¥116. A falling dollar makes Japanese exporters less competitive and the country’s shares more expensive relative to American competitors.
Thanks to good relative performance in both February and Apr
il, Tokyo has still done well this year. The MSCI World Index was down 18% as of July 30th while MSCI Japan was up 1% (both in dollar terms). But this year’s strong showing followed weak performance last year so the trailing three year return is still lower than for Europe or America.
Investor sentiment
Another important explanation of the recent decline is probably increasing disappointment at the lack of financial reform. Junichiro Koizumi, in over a year as prime minister, has not met the promises he made when he was elected.
The privatisation of the Japanese post office – which both delivers the mail and is the world’s largest bank and largest insurer - was seen by many investors as Mr Koizumi’s most important promise. But the prime minister’s opponents with the ruling Liberal Democrat Party have managed to block significant reforms.
Outlook
A substantial piece of good news is needed to revive the Japanese stockmarket. But no positive changes are apparent at present. Both the political deadlock and the weakness of the financial system seem insurmountable. So the probability that Mr Koizumi will deliver his promised reforms looks small.
There is also the risk of an external shock. For example, an American attack on Iraq would disrupt Japan’s oil supply.
