No. 2 — January 19, 1996


Weekly Review

--- by Jon Choy

Investors in Japanese equities endured a bumpy ride in 1995 as stock prices were buffeted after a major earthquake struck the Kobe-Osaka region, the yen rapidly appreciated and serious doubts and uncertainties arose about the health of the Japanese banking system and the equilibrium of domestic and foreign affairs. As measured by the Nikkei average of 225 stocks traded on the first section of the Tokyo Stock Exchange, 1995 ended — happily — at a point slightly higher than it began. With the Japanese economy showing more signs of getting back onto a smoother slope, investors are hopeful that 1996's gains will be steadier and stronger. Potential market pitfalls still lie in the road ahead, however, and investors easily could return to a bearish frame of mind.

Investors with holdings in Japanese equities at the end of 1994 probably wish that the first half of 1995 had never happened (see Figure 1). With Tokyo actively stimulating the economy in late 1994 and confidently predicting an upturn in real growth, a few domestic and foreign brokers predicted that 1995 would be a profitable year. The Nikkei 225 average, however, suffered a 39.20-point loss January 4, the first day of 1995 trading. As investors digested the impact of the January 17 Great Hanshin Earthquake on corporate profits and overall economic growth, the Nikkei 225 dropped 1,054.73 points January 23. Another body blow to investor confidence accompanied the yen's series of record highs against the U.S. dollar (see previous article); reflective of that, the TSE lost 758.66 points April 3. The market hit the 1995 nadir July 3, closing at 14,485.41 or 26.6 percent lower than at the end of 1994.

To investors' joy the second half of 1995 was as good as the first half was bad. Almost immediately after hitting the year's low point the Nikkei 225 recaptured 1,382.64 points in trading July 6 and 7, as Tokyo moved to bolster the economy and cool the yen's rise. In response to rumors that the government was assembling a record-breaking fiscal stimulus package the Nikkei jumped 706.01 points August 16. A further rise to 18,758.55 September 14 greeted the Bank of Japan's reduction of short-term interest rates to record lows. Signs that growth was returning to the economy plus reduced fears that the country's banking system might collapse helped the Nikkei 225 inch its way up into the 19,000 range by early December. The yen's fall against the dollar picked up in the last two weeks of 1995, dropping the exchange value from ¥101 to the dollar to ¥105. The market responded by closing at 20,011.76 December 27 before ending the year two days later at 19,868.13 (see Figure 2). This meant that the Nikkei average had eked out a 0.7 percent gain for the entire year but, viewed in terms of its 1995 low point, the rise amounted to 37.2 percent.

Foreign investors, again showing greater confidence in Japanese equities than domestic investors, jumped into the market as buyers the first day of the 1996 trading year, sparking a 749.85 point rise in the Nikkei average to 20,618.00. Although nearly half of this gain did not last until the middle of January, the index remains above the psychologically important 20,000 mark. At this level the Nikkei average helps banks and other institutions burdened with bad loans by boosting the value of their stock investment portfolios and, thus, their capital bases. Overall, market watchers agree, the mood of Japanese investors and brokers now is much brighter than just six months ago.

Nevertheless, contrarians are warning that some important conditions still must be achieved before market bulls can rest easy:

While the securities industry can play a role in determining some of these factors, most of these conditions are out of its control. One area that the brokerages are addressing diligently is ending the red-ink entries on the bottom line of their business ledgers. Although the top four brokerage houses are likely to report some profits for FY 1995, nearly all smaller dealers again will report losses. Observers still expect a wave of consolidations and mergers to sweep the industry within the next few years.

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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