No. 2 — January 14, 2000

 

Weekly Review

TOKYO STOCKS END 1990S ON UPBEAT NOTE
--- by Jon Choy

Owners of Japanese equities watched warily but happily in 1999 as the Nikkei average of 225 stocks listed on the first section of the Tokyo Stock Exchange broke a three-year downward spiral. At 18,934.34, the index closed the trading year more than 41 percent higher than where it had begun. While questions persist about the economy's recovery and worries mount over the course of Tokyo's fiscal policy, securities analysts see several bright spots that could help sustain the Nikkei's upward drive through 2000. These include structural changes in domestic equity markets and surging interest in all things Internet-related.

In contrast to 1997 and 1998, the Nikkei 225 trended mainly upward throughout 1999 (see Figure 1).

Analysts point to several factors underpinning this development:

One remarkable aspect of the Nikkei 225's performance in 1999 was the index's relatively steady rise despite the yen's appreciation against the dollar, particularly after May. Indeed, the influx of foreign investors into the Japanese market, most analysts agree, was one factor behind the greater demand for yen in global foreign exchange markets. The yen's increase in value relative to the greenback does threaten the export profitability of multinationals, but foreign investors apparently felt that Japanese shares were a good buy even with exchange rate risks factored in.

The last year of the 1990s stood out in stark contrast to the rest of the decade. As in 1989, which coincided with the final stage of the "bubble economy," the Nikkei 225 hit its 12-month low on the second day of 1999 trading. It then worked its way steadily up to close at the highest level for the year at the end of December (see Table). The market's ability to shrug off negative domestic news was not absolute. The Nikkei 225 also was pulled down often by developments in other parts of the world, particularly in U.S. equity markets. At the same time, though, the American bull market sparked some of the Nikkei 225's biggest surges. For example, a jump in the Dow Jones industrial average and the NASDAQ composite to record highs pumped the Nikkei 225 up by 381.55 points, or 2.11 percent, December 12.
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High, Low and Yearend Values of the Nikkei 225 Average, 1989-99

High

Low

Yearend

Value

Date

Value

Date

1989

38,915.87

38,915.87

December 29

30,183.79

January 5

1990

23,848.71

38,712.88

January 4

20,221.86

October 1

1991

22,983.77

27,146.91

March 18

21,456.76

August 19

1992

16,924.95

23,801.18

January 6

14,309.41

August 18

1993

17,417.24

21,148.11

September 13

16,078.71

November 29

1994

19,723.06

21,552.81

June 13

17,369.74

January 4

1995

19,868.15

20,011.76

December 27

14,485.41

July 3

1996

19,361.35

22,666.80

June 26

19,161.71

December 24

1997

15,258.74

20,681.07

June 16

14,775.22

December 29

1998

13,842.17

17,264.34

March 2

12,879.97

October 9

1999

18,934.34

18,934.34

December 30

13,232.74

January 5

Source: Tokyo Stock Exchange

Japanese market watchers have been pouring over their crystal balls trying to divine the Nikkei 225's course in 2000. A small rise on the new year's first trading day (January 4) put the index over the 19,000 mark, a level not seen since 1997. Analysts briefly hoped that the market would avoid major losses in the early days of January, a disheartening pattern that has characterized the last several years. These hopes were quickly dashed, however, when a correction in the Dow Jones and NASDAQ indexes dropped the Nikkei 460.31 points, or 2.42 percent, January 5. Continuing corrections in the prices of high technology stocks pushed the index down another 374.28 points (2.02 percent) the following day (see Figure 2).

Despite these early setbacks, domestic and foreign stockbrokers agree that the Nikkei has significant upside potential in 2000. Some analysts expect corporate restructuring plans to begin bearing fruit this year, which will help a wide range of companies to improve their balance sheets. Experts also predict that the U.S. economic expansion will set a record for longevity in 2000, continuing to stoke demand for exports of consumer and capital goods alike. In addition, Japan's nascent Internet industry also will remain a red-hot play, according to many observers.

This industry, in particular, will benefit from a series of structural changes in Japan's equity markets. Both established stock exchanges and over-the-counter markets are moving to create new trading venues for entrepreneurial start-ups. A new section launched by the Tokyo Stock Exchange — the Market of High Growth and Emerging Stocks, more commonly known as MOTHERS (see JEI Report No. 42B, November 5, 1999) — conducted its first day of electronic trading December 22. Although only two companies were listed, Internet Research Institute Inc. and Liquid Audio Japan Inc., buy orders outnumbered shares offered for sale by 7,423 to 160. Not surprisingly, the prices of both IRI and Liquid Audio Japan registered very strong gains.

In addition, the National Association of Securities Dealers, Inc. and Softbank Corp. have firmed up their plans to begin an over-the-counter market in Japan that also will target venture capital start-ups. The partners, which formed NASDAQ Japan Planning Co., Ltd. last summer (see JEI Report No. 28B, July 23, 1999), finalized an agreement with the Osaka Securities Exchange December 25 to launch the new OTC market. It will be modeled after and operate like NASDAQ.

Observers also see the ongoing revolution in how Japanese savers invest their money as another source of stock-buying potential. Portfolio diversification and sophisticated pension planning are the new buzzwords, and an army of securities brokers and investment advisers — domestic and foreign — are rushing to educate customers and tap Japan's giant pool of personal savings.

In sum, the general consensus is that Japanese equity markets have begun to shake off the negative effects of the 1990s and are starting the new millennium with many positive factors to build on. Time obviously will tell whether this upbeat forecast, heard so many times before, finally comes true in 2000.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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