Despite Japan's overall annus horibilis in 1995, quite a few international investors remain positive, some increasingly so, on that country's stock market.
There has been much to deter investors: from the Kobe earthquake to the yen's surge earlier in 1995. The year also brought a frightening Tokyo subway attack, crises at some financial institutions and, lately, pronouncements that the economic recovery had stalled.
But many investors believe Japan is finally doctoring its economy. Already, major central banks have boosted the dollar, and in turn helped lower the yen. Meanwhile, Japan has increased its money supply; when that filters through, it should help pump up the economy and the stock market, optimists say.
And more help is expected imminently. For instance, close observers foresee an economic stimulus package coming this month as part of a supplementary budget announcement. Although the size of that package hasn't been announced, some experts predict it will involve at least 10 trillion to 12 trillion of public expenditures. In addition, a bailout program for Japan's beleaguered housing loan corporation could be announced shortly. This would come on the heels of the government's 20 billion rescue of credit union Cosmo Shinyo Kumiai - Japan's fourth financial institution to fail in the past year.
The government's measures are cheering many investors. They believe Japan is finally grappling with its entrenched economic/financial problems. To Richard Oldfield, chief investment officer-equities, of Mercury Asset Management International, London, Japan has "crossed the Rubicon." Through its use of monetary and fiscal stimuli, "the Japanese government is now on the path of reflating the economy," he declared.
On Sept. 8, Japan's central bank cut the discount rate to a record low of 0.5% from 1%. Such a move had been expected by Paul Hopkins, chief investment officer of IDS International Inc. in London, who also foresees the government using fiscal, as well as monetary, policies to invigorate the economy.
Mr. Hopkins also foresees favorable political developments. On Sept. 22, the powerful Liberal Democratic Party will hold elections for its party's presidency, with the winner expected to be Ryutaro Hashimoto, minister of international trade and industry (MITI). He, in turn, is viewed as a strong contender for prime minister. (General elections are expected to be held late this year or early in 96.)
Mr. Hashimoto "is a major proponent of the view that government hasn't done enough to solve Japan's (economic) problems and must do more," said Mr. Hopkins. Undoubtedly, he would stress this theme in coming months. Using his position as party leader, Mr. Hashimoto would "push through economic change with MITI and the Bank of Japan." And he would also use "this platform to help the LDP win the election," Mr. Hopkins predicts.
As its investment strategy, IDS aggressively added to its Japanese holdings late in July - "just before the market took off," said Mr. Hopkins. Although the firm is now mainly holding its Japan weighting, it has taken advantage of the recent market dip to add to favored positions. At the moment, IDS has a slightly overweighted 28% exposure to Japan for global portfolios and likes such stocks as those of Sankyo Co. Ltd. in pharmaceuticals, Hitachi Metals and Nippon Telegraph & Telephone Corp.
In the last eight weeks, Mercury Asset Management made a modest increase to its Japan weighting, although Mr. Oldfield won't say how much. (The firm is slightly underweighted in Japan.)
"We have been selectively buying, particularly companies expected to benefit from the yen's depreciation and the eventual recovery of the Japanese market," he said - without naming any stock favorites. Overall, Mercury thinks "a lot of companies are attractive on a valuation basis." And now is a reasonable time to be investing in Japan, especially for a firm like Mercury, where the investment horizon is "looking out some time," said Mr. Oldfield.
In June, WorldInvest Ltd., London, moved from a slightly underweighted to overweighted position in Japan. Mark Beale, the firm's head of equities, expects that market to gain another 10% to 20% during the next year. Therefore, WorldInvest expects to remain overweighted in Japan - although it has hedged a substantial amount of its yen exposure back to dollars for American investors. WorldInvest expects Japan's authorities to "contain the (financial) crisis ..... with decisive steps."
Such measures, along with action on the overall economy and a lowered yen, should boost confidence and the economy. In turn, market beneficiaries should include "domestic cyclical stocks and domestic demand stocks," said Mr. Beale.
On the downside, many local retail and institutional Japanese investors have been avoiding their stock market. Debate rages over whether this will change. But optimists hope that, at minimum, Japan's retail sector will begin to buy shares - especially when the investors compare shares with paltry-yielding fixed-income issues.
Some observers think local market investors are waiting for some sign of economic brightening.
For its part, Nikko Capital Management (U.S.A.) Inc., New York has been beefing up its Japan holdings since the second quarter. The goal: to lift Japan weightings at least to neutral levels as defined by Morgan Stanley Capital International indexes. At current prices, the market looks to be a "very good buy," said Shigekazu Kurishima, who was chairman and president of Nikko Capital Management (U.S.A.) until Sept. 15.
Before July, the firm of Peter Cundill & Associates, based in Vancouver, British Columbia, had only a tiny exposure to Japan. Now, it has about a 16% weighting in international portfolios - not for macroeconomic reasons, but because the value investor finally found some exceptional buys. These were predominantly in the stocks of Fuji Photo Film Co. Ltd., Matsushita Electric Industry Co. Ltd., Hitachi Ltd. and Koa Fire & Marine Insurance Co. Ltd.
"In all these cases, the latent or extra assets of the companies, net of debt, are equal to the stocks' capitalizations. So we're buying the operating businesses for nothing or next to nothing," explained Vice President Tim McElvain, in the Kingston, Ontario office.
But not everyone is enchanted with Japan's market. For example, Hake Capital Management Inc., Scottsdale, Ariz., still has a zero exposure to Tokyo.
Although President Mark Hake believes some smaller stocks are starting to look more like "true value" buys, underlying corporate management remains a problem in Japan.
Two weeks ago, Alastar Haddow, investment director, Murray Johnstone International Ltd., Glasgow, Scotland, began trimming exposure to Japan. That week, the firm sold about 12% of its Japan holdings in an effort to get to a neutral-to-slightly underweighted stance. Some of the reasons for the selling: the market's run-up recently - in which the Nikkei 225 stock index jumped 22.8% between July 3 and Sept. 5 - and the fact that "a lot of good news" about economic stimuli "already had been factored into the market, he said.
"For the short term," the firm might "take a bit more out" than the 12% if market continued to rise, said Mr. Haddow.
Murray Johnstone foresees a near term market correction of about 10%. But after that, the market could rebound. Once the expected correction ends, the market could again benefit from positive trends - including signs that the LDP would win a general election, he said.