On the other hand, MSCI Japan is plus 1% this year, up until August 23rd, while the world average is down 15%. Clearly the Tokyo stock market, compared to stock exchanges in Europe, is much more influenced by local factors and much less by the US.
This spring the yen rebounded sharply against the dollar, after trading in the range ¥127-135 to the dollar during five month until the middle of May, it has traded below ¥1
21 since the end of June. A falling dollar makes Japanese exporters less competitive and the country’s shares more expensive relative to American competitors. But this is old news.
Investor sentiment
Instead it is local news, especially from the financial sector, that has scared investors during August. For example, the Financial Services Agency published new data on non-performing bank loans as of March, showing an increase by 22% to 52.4 trillion yen. The cause of the steep increase is tougher loan classification standards. But these have only been applied to the larger borrowers at the larger banks yet, which means that further increases are probably in the pipeline.
Political considerations are also more important than in other equity markets, and the disappointment at the lack of financial reform continue. Junichiro Koizumi, in over a year as prime minister, has not met the promises he made when he was elected. On top of this 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.
But perhaps the night is darkest right before dawn, maybe the Japanese sun will find a way to rise soon. At least, a positive surprise is more likely when none is expected.
