TOKYO SHARE PRICES BEGIN FY 2000 ON THE UPSWING
--- by Jon Choy

Ignoring the fact that Japan's gross domestic product contracted during the last half of 1999 (see JEI Report No. 11B, March 17, 2000), investors signaled their confidence in the economy by pushing up equity prices on the Tokyo Stock Exchange during the January-March quarter as measured by the Nikkei average of 225 first-section shares (see Figure). Foreign interest in Japanese stocks remains strong, and domestic investors are beginning to catch buying fever. Market watchers believe that several factors are in place that will put more wind in the sails of Japanese equities and, in so doing, provide a welcome change from most of the 1990s.

In contrast with previous bouts of Japan's own version of March Madness, equities trading during the final month of FY 1999 exhibited several new characteristics:

• In the past, Japanese companies typically sold portions of their investment portfolios to bolster their bottom lines for the critical March 31 end-of-year accounting and then bought the shares back soon after the new fiscal year began April 1. Tokyo added its weight to this practice, engaging in what traders call price-keeping operations just before the critical fiscal half-year and full-year dates. This window dressing whipsawed stock prices in March and April, unsettling investors and making companies' annual reports less valuable as a complete and accurate picture of their financial health. However, tougher accounting rules and changing attitudes about the need to always show a profit have combined to reduce the volume of improving-the-books trading.
• The corporate tradition of holding stakes in business partners as a sign of loyalty and commitment was one reason that firms bought back in April shares that they had sold in March. Permanently disposing of cross-held shares was tantamount to breaking off commercial relations with firms whose stocks were dropped. Thus, companies preserved their cross-held shares, even when doing so made little financial sense. The prolonged slowdown of the 1990s, however, altered that psychology. Executives increasingly are adopting a hard-nosed, calculating approach to business decisions. According to market watchers, banks were especially active this March in unwinding their portfolios of cross-held shares, dumping underperformers. Such sales not only free up cash for banks but also boost the supply of shares for trading.
• The sustained, strong interest of overseas investors in Japanese stocks has helped to power the Nikkei's rise. Foreigners have been net buyers of Japanese shares for almost two years now, and their market interest seems to be unflagging. The yen's appreciation against the dollar is another boon to offshore traders, although many observers consider it just the icing on the cake.

Although it lost 369.33 points during March 30-31 trading, the Nikkei 225 average ended FY 1999 at 20,337.32 — its best showing in four fiscal years and nearly equal to FY 1995's 21,406.85 close (see Table). Since the beginning of 2000, the index more often than not has ended trading days in gain territory, brushing aside negative developments in the yen/dollar exchange rate and in overseas markets. The strength of the current upturn can be seen in the Nikkei's April 3 close. The index finished up 389.67 points at 20,726.99 on the first trading day of FY 2000, ending its two-day slide. Investors shrugged off news of Prime Minister Keizo Obuchi's incapacitation due to a stroke (see article in this issue), focusing instead on positive economic news.
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Nikkei 225 Average, End-of-Year Value,
FY 1994-FY 1999

Observers agree that demand for shares from several sources could give some real legs to the current run-up in stock prices:

• Investment trusts — Japanese-style stock mutual funds — are becoming increasingly popular with a broader range of investors. With major banks, insurers and even nonfinancial firms getting into the investment advisory business, more and more investment trusts are available. These vehicles have become a steady and strong source of buying sentiment, something the market has lacked for many years.
• The relatively high-paying postal savings system time deposits that people made a decade ago will begin maturing this spring. Analysts expect that a significant portion of this multitrillion-yen nest egg will not stay in the now low-return although very secure postal savings system. Even if only a small share of the expected huge outflow goes into stock purchases, buying momentum should be reinforced.
• The advent of 401(k)-style pensions is on the horizon. The cabinet has approved legislation that will allow companies to offer defined-contribution pensions modeled after the popular U.S. retirement plans, and the implementing legislation is expected to be approved during the current Diet session (see JEI Report No. 10B, March 10, 2000). Financial services providers, some brand-new, are busy preparing for this new market. Observers anticipate a surge of pension-related stock buying next year when the legislation takes effect.
• Dot-com mania has taken Japan by storm. Although there are fewer Internet-related investment opportunities in Japan than in the United States, investors are eyeing domestic and locally traded foreign Internet stocks with great interest, hoping to get in on the ground floor. Internet start-ups that recently have gone public have enjoyed a hearty welcome from investors and seen their share prices soar.
• On-line equity trades are becoming popular. As it has in the United States, low-cost Internet trading has enticed individual Japanese investors back into the market. This group soured on domestic stocks in the 1990s when it became clear that brokers were making sweetheart trades for top clients and engaging in other ethically questionable practices. Now that individual investors are able to circumvent old-line brokerage houses, they are slowly returning to the market.

If Tokyo's optimism about the economy's performance during the first quarter of 2000 proves to be justified, some analysts believe that the TSE could continue its upward march for months to come. This scenario would be to banks' advantage since they can count a percentage of latent stock portfolio profits in their capital bases. According to one projection, Japan's 17 largest banks had unrealized equity profits of nearly ¥12 trillion ($109.1 billion at ¥110=$1.00) as of March 31, double the estimate for the end of September 1999. However, if the Nikkei average does stay on an upward track, the positive effects for Japan's economy could be even more broad-based.