A number of international managers have turned thumbs down on the Japanese government's latest announced $123 billion stimulus package, and some foresee a recession this year in Japan.
Their sentiment joins a worldwide chorus of concern about Japan, as bankruptcies proliferate, and ways of stemming the tide appear elusive.
The Bank of Japan's Tankan quarterly survey of business sentiment recently showed confidence at its lowest level since mid-1994. And, according to early April press reports, Sony Chairman and Chief Executive Norio Ohga sees Japan's economy heading toward collapse if swift, adequate action isn't taken.
But a number of managers believe the proposed remedies are devoid of the bold steps needed for a turnaround. Instead of heavy reliance on public works spending and only temporary income-tax cuts, they prefer sizable, permanent tax relief and more deregulation and restructuring of Japan's economy.
Until such moves occur, many predict continued malaise in Japan. As a result, a number of investors are keeping low profiles in Japan.
* New York's BEA Associates has about 8% of its international equities in Japan, vs. that market's 22% weighting in the Morgan Stanley Capital International Europe Australasia Far East index. William P. Sterling, executive director and global strategist, holds there is no reason to "rush into Japan unless we are all surprised and see Reaganomics somehow arise."
* Edinburgh Fund Managers, Edinburgh, Scotland has about 12% in Japan in its its broad international portfolios. It sizably trimmed its allocation to that market in July from roughly a 25% neutral weighting and has undertaken more marginal reductions since then, said Kevin Gibson, the firm's head of Japanese investments.
* Bankers Trust Co.'s BT Investment International Equity Fund has 4.5% in Japan, and co-lead manager Robert Reiner in New York believes "we don't need more than that. We can find better stock valuations in Europe."
* Pinnacle International Management, New York, has about 5% of international equity portfolios in Japan. "At this stage, all indications suggest the market will not do much, and may even decline from these levels," according to President Nicholas Reitenbach.
* Boston's Acadian Asset Management has underweightings to Japan that range from seven to eight percentage points to as little as two to three percentage points. While Acadian likes some typically big-cap companies in Japan, "on aggregate, our near-term outlook is not bullish," said portfolio manager John Chisholm.
* Paul Drexler, portfolio manager, international equities, at Loomis, Sayles & Co., Boston, has about 8% in Japan now, having reduced it from about 12% in December.
While Mr. Drexler sees some signs of change on the corporate level in Japan -- including more interest in performance-based compensation and a gradual increase in share buy-backs --he'd "like to see a good deal more vigor in these areas before significantly increasing" his Japan exposure.
Some investors believe some sort of economic shock will be needed to fire the major changes necessary for a turnaround. Without such a jolt, the country might remain wedded to its compromise-oriented way of making decisions.
Moreover, although expectations of lifetime employment are diminishing, many Japanese companies still try to maintain this tradition, which has included a seniority-based wage system.
"Therefore, you have companies that are hugely overstaffed with large wage bills, and a social security system being picked up by the corporate sector," said Mr. Gibson of Edinburgh Fund Managers.
While government policies have tended to protect the ailing banking sector, which is beset by bad loans, many investors believe such weak links should be severed to pave the way, eventually, for a much healthier financial industry.
To Bankers Trust's Mr. Reiner, change "will have to come out of duress.
"I see more bank failures, and failures of insurance and property companies."
Some large institutions would collapse, he believes, but their demise would create a slimmer, more efficient industry.
Not only would it take "inefficient capacity out of the system," he said, since Japan is already "one of the most overbanked countries in the world," but it also would create some stronger remaining companies that, he hopes, would be able to resume lending to Japan's cash-starved smaller companies.
(Bankruptcies overall are on the rise. According to data of Bridgewater Associates, Wilton, Conn., a record 1,816 Japanese companies failed in March. In a report, Bridgewater said bankruptcies have exceeded 1,500 per month in five of the past six months; before October, the previous record for the most bankruptcies in any one month in the 1990s was December 1992, when there were 1,454 bankruptcies, Bridgewater reports.)
Less regulation urged
In addition, some managers believe Japan should rethink economic direction -- moving more toward value-added industries such as software -- and shed more of the regulations that have barred foreigners. If more international competition were allowed, companies could enjoy lower costs and enhanced productivity, some experts believe.
Many investors also want larger income tax cuts than the Y4 trillion proposed for this year and next.
And they'd like tax cuts made permanent.
If not, worried consumers are expected to bank, rather than spend, money received from tax cuts.
But experts concede that such broad dismantlings of a time-honored system would be painful and possibly incendiary. What's more, even the proposed stimulus package represents a policy change for the current government; before the current crisis, it had made budget deficit reduction a priority.
Change will be slow
Amid the raft of crosscurrents at work, many international investors have reason to expect fundamental changes -- the kind they believe Japan needs for revival -- will come slowly. In the meantime, some managers say the values surfacing in the Japanese market will have to be ignored.
To Arthur A. Micheletti, chief economic and investment strategist for Bailard, Biehl & Kaiser, Foster City, Calif., Japan "is the cheapest market in the world." But before he'd invest more heavily, he'd "wait for the proper buy signals," which don't appear imminent.
The firm has a 10.5% exposure to Japan in its international equity fund vs. its benchmark weighting of 12%.
"We've been hearing of valuation indications in Japan that are much better than those in the U.S. on a price-to-cash earnings basis and on a price-to-book value basis too," said BEA's Mr. Sterling.
"But that said, Japan is like a big closed-end fund trading at a discount." he said. "The question is, where is the key to unlocking value?"