Japan

Recent headlines on Japan reflect continued skepticism toward both the economy and the corporate/political leadership.

Signs of Recession Persist In Japan

Nippon Life lost more than $2 billion on euro-denominated bonds due to the European currency's 24% tumble against the yen in the year ended March 31.

Japan's life insurers remain under pressure, with fiscal-year earnings for the sector's leaders weighed down by poor investment returns and policy cancellations.

Woes May Endure For Japanese Banks

Japan’s Big Banks Risk Trouble If Debt Reserves Aren’t Enough

Japan Needs More Than A New Political Shuffle

Yet, the flow of economic news is clearly improving, and some commentators are even detecting a change of management attitudes in the corporate sector.

Japanese economy improving

Household spending boost for Japanese government

Japanese machine tool orders rise 23.6%

MOF surveys boost GDP hopes
Japanese companies showed a strong willingness to spend on new plant

Japanese capital expenditure rose 3.3% in the first quarter, the first increase in nine quarters.

Japan first-quarter GDP grows 2.4%

Japanese Business Has Really Turned the Corner

Here are some more bits of good news on the Japanese economy that I did not find in the headlines:

The media reported that Japan’s April machinery orders were down 1.1% from March. More importantly, however, they were up 13.4% year-to-year, vs. a 6.7% year-to-year gain the month before. (ABN AMRO)

According to the MOF’s June survey, corporate profits are advancing strongly, (38+ percent year-to-year in the March quarter), with corporate cash flow also rising 21% year-to-year – the highest growth in 11 years. (ABN AMRO). As a result, capital increased 3.3% year-to-year.

Business sentiment among large companies is now at its highest level since 1991. Small-business sentiment is also on the rise.

Consumer confidence in April was at a multi-year high. Job offers are moving up, as are overtime pay and plans to hire new graduates.

Manufacturing overtime hours are up 13% year-to-year. Business electricity usage is up 4.6%.

There were 1169 cases of M&A in Japan in calendar year 1999, vs. 834 in CY 1998 and 753 in 1997. Based on 615 cases reported through April, the figure for CY2000 could be 50% larger than for 1999. (Commerzbank)

Tokyo real estate is showing signs of a turnaround.

69% of Japan’s $11 trillion of household savings are owned by people aged 60 or older. I would not expect a destabilizing, drastic change of saving patterns as a result of deregulation…

The ridiculous impact of indexing cannot be overemphasized: Important changes were implemented in the Nikkei index on April 14. In the four days that followed, the 225 deleted stocks declined an average 25%, while the 225 stocks added to the index rose 7.5% on average. (Nomura)

About the GDP figures: As far as I know, real government spending has been declining. So, the private economy may have grown at a higher rate than the 2.4% GDP figure, in the first quarter.

All in all, I would say that the Japanese stock market is still climbing the legendary “wall of worry” that characterizes bull markets.

Still, valuations are still high in relation to growth prospects -- Japanese demographics do not support a long-term growth rate for the economy much above 2%.

The real play, in Japan, is in much better utilization of woefully idle corporate assets, whether they are cash piles earning 1% in the bank, useless real estate purchased during the bubble days or cross-holdings of shares that no longer profit either the companies or their shareholders. We still have in the Tocqueville International Value Fund a couple of companies whose cash holdings net of debt exceed their total stock market capitalization.

To the extent that brokers do not yet look at shares in terms of hidden values or the potential higher returns from currently unproductive assets, opportunities still exist. But uncovering them takes time and hard work. Suggestions are welcome…

François Sicart

June 2000
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