With Japan's export profits eroding as the yen climbs to record highs against the dollar, Tokyo stock traders could hardly have been blamed if they had all run for cover. Instead, the Nikkei has risen 10% in three weeks. And suddenly, a growing number of market watchers are saying that the three-year bear market is finally over and that stocks will continue moving higher.
This new optimism is being fed by the government's two-pronged effort to bolster the market. The Finance Ministry is accelerating plans to pump billions in government-controlled savings into stocks and easing reporting restrictions. More important still is a huge government spending plan to spur the economy that is almost certain to be introduced in a few weeks. That should help the profit picture for many companies hurt by the recession.
ALL ABUZZ. Japan's bureaucrats have been busy rewriting the financial markets' rules to encourage more funds to flow into equities. By lifting ceilings on stock investment for some public funds, the government has freed up $15.6 billion to buy shares, including billions from the postal savings and insurance systems. An additional $24 billion has been set loose for stock investment next year, and the market has been abuzz with talk about yet more allocations expected to be outlined in the next few weeks. Finance has also been twisting arms to persuade institutional investors not to sell and has suspended various accounting rules that in the past led companies to sell stocks just in order to dress up their earnings reports.
The ministry's machinations have led to some grumbling about perverting market forces. "There is no fundamental reason the market should be up," says Lewis Tseng, director of equity-derivative sales at CS First Boston Inc. in Tokyo. The naysayers also maintain that the government's intervention is aimed at bolstering banks and other key financial institutions whose balance sheets close at the end of the Mar. 31 fiscal year. Immediately afterward, the market may pay the price for being rigged, they argue. "I wish I could say that this was natural price formation, but it's not," says Makoto Kuramoto, director of investment at Toho Life Insurance Co.
But Tokyo is doing more than just directly propping up the Nikkei. The ministry and the ruling Liberal Democratic Party are close to a deal on a huge $120 billion spending package aimed at stimulating the overall economy, which is now growing at a puny 0.1%. Some announcement is expected before Prime Minister Kiichi Miyazawa meets President Clinton in mid-April. The government is betting that its budget will contribute to business confidence. That should give the market some room to grow and would relieve the pressure for further bailouts from the Finance Ministry. Based largely on faith in pump-priming measures, Salomon Brothers Inc. has just raised its estimates for the Nikkei's medium-term trading range--up from 16,000-19,400 to 17,000-22,000.
SOOTHING PROSPECT. The new government spending won't kick in until later in the year. In the meantime, the market may face shocks, as companies reveal just how tough things were in the fiscal year ending Mar. 31. But knowledge that pump-priming is on the way should ease any market reaction to poor earnings. "As long as people know the fiscal measures are in train, the risk [of a market dive] is not that serious," says Salomon economist Robert Feldman.
If the government's overall fiscal program works, the policy mandarins hope that it will eliminate the need for any further short-term market props. A recent survey of 1,480 nonfinancial companies by the Nihon Keizai Shimbun showed that they are expecting a 6.8% increase in pretax profits in the fiscal year that will start on Apr. 1. "Probably by early summer, investors will start thinking about fiscal 1994, when there will be a big turnaround in corporate profits," says Tetsuo Tsukimura, chief economist at Smith Barney, Harris Upham International Inc.
Japan's critics may hate to hear that its bureaucracy can manage the market. But for the moment at least, that's what the bureaucrats are doing--and they may just pull it off.