Tokyo's Bull Is Just Waking Up

A stable yen and easy credit fuel Japanese stocks

It's hardly a reprise of the bubble years, yet the scent of quick money is in the air again at the Tokyo Stock Exchange. When Daiwa Securities Co. recently targeted office workers and housewives with ads in women's magazines promoting its "ministock" program for modest-size trades, 50,000 new customers signed up.

They're not the only Japanese investors returning to equities for the first time in years. With life insurers and other big institutions joining foreign investors, the Nikkei stock average has rebounded to a four-year high of 22,282 (chart). Market watchers expect the index to gain an additional 1,000 points or so, to finish the year up 15% from its 1995 close. Some even see the Nikkei hitting 25,000 in 1996.

Such bullish sentiments haven't been felt on the Tokyo exchange floor for a long time. After its 1989 peak, the Nikkei plunged into a death spiral, shedding more than 60% of its market value by the time it hit its low of 14,500 last summer. Then the market finally turned around. As Japanese financial authorities took forceful steps to rein in the soaring yen and slash interest rates to record lows, overseas investors poured in some $62 billion in a huge bet on an economic rebound. Now the locals, convinced that the yen will remain stable and credit easy, want in on the action.

FEELS DIFFERENT. Indeed, the Ministry of Finance (MOF) wants to make it as easy as possible for Japanese investors to take part. The Ministry has pushed through deregulatory moves to make it easier for money managers running Japan's $2 trillion pension market to invest in equities. Free to steer more money out of government bonds yielding 3% and into stocks offering richer potential returns, pension funds plan to sink $40 billion into equities in 1996. The market has also seen a wave of new investment trusts--the equivalent of U.S. mutual funds--focus on stocks.

Tokyo's stock market staged abortive recoveries in 1993 and '94, of course. But this one feels different. After four years of stagnation, investors are regaining confidence in the economy. Japan is on track for gross domestic product growth of about 2.5% in 1996, with manufacturers preparing to announce profit gains of more than 20% for the fiscal year that ended in March. Analysts expect pretax earnings to rise an additional 33% in the fiscal year ending in March, 1997. Industrial production, business investment, and consumer spending are also showing impressive gains. Even commercial property prices may be close to bottoming out.

Small wonder that Tokyo stock-pickers have jettisoned their defensive strategies of buying only companies with a proven technology edge, pricing power, or scads of cash. Now, some are moving into lesser known companies traded on the over-the-counter market that may have better potential for stock-price gains. Shuei Abe, manager of the Warburg Pincus Japan OTC Fund--whose net asset value has jumped by a third since last June--thinks innovative retailers will ride the rebound in consumer spending. One of the likely winners, he says, is Yamada Denki Ltd. The company is growing 40% annually by supplying personal computers to small markets outside Tokyo and Osaka untouched by larger retailers. It's a lean operation, with overhead costs that are half the industry average.

Big-capitalization cyclical issues are also back in fashion. Rebounding business investment should help construction-equipment giant Komatsu Ltd. enjoy a 25% earnings gain in the current fiscal year. But many investors are steering for auto stocks. If the yen remains between 105 to 110 to the dollar this year, operating profits at Nissan, Honda, and Mazda should double, reckons Salomon Brothers Inc. analyst Chikao Masuzawa.

TOUGH TESTS. Even high-tech issues, such as Toshiba Corp. and Kyocera Corp., which were bid up dramatically by foreign investors late last year, are still worth a look. Companies such as Canon Inc. and Tokyo Electron Ltd. that make semiconductor production equipment should benefit from supplying what Salomon Brothers Inc.'s Hiroshi Yoshihara points out are some 64 chip plants coming on line during the next three years. These factories alone represent $1 billion apiece in new investment. Electronics companies are expected to see pretax earnings advance 30% this year.


Even though spirits are high, the rally still could face some tough tests before a bull market is finally in place. Some analysts fret that the Bank of Japan might raise rates modestly in late 1996 if the economy rebounds too quickly. Consumer spending may suffer a bit if the MOF, as expected, pushes through a hike in the national consumption tax in 1997 to cope with Japan's widening budget deficit. The rising deficit itself could push long-term interest rates higher and dim the traders' ebullient mood. And while banks are currently enjoying a windfall by borrowing at near-zero rates and plowing the money into stocks and Japanese bonds, their estimated $800 billion in bad debts is still expanding, thanks to record-high corporate bankruptcies. A big bank failure could trigger a run on bank stocks--a sector representing 23% of the Tokyo Stock Exchange's market capitalization.

So far, though, the Nikkei's turnaround looks like anything but a fluke--especially now that consumers are starting to buy. Kenichi Sagami, general manager of equities for Yamaichi Securities Co., points out that individuals control $11 trillion in financial assets. If Japan's penny-pinching homemakers are starting to get into the act, this rally could have some staying power.

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