Japan's Stock Market Waits on a US Recovery

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Shuji Kajiyama / AP

Passersby cross an intersection in front of an electronic stock board in Tokyo

One way to raise your share price: turn employees into customers. But that trick — what some Toyota department heads in Nagoya, Japan, did this week by asking managers to purchase new cars by the end of the fiscal year — won't stop Toyota's sliding stock. As a stronger yen continues to batter Japanese exporters selling into depressed economies around the world, the Nikkei 225 stock index dances around its 26-year low.

Even that's not enough to excite investors. On the first trading day of 2009, buyers lifted the Nikkei to above the 9000 level for the first time in two months. The boost, however, was short-lived, and the Nikkei continued to drop, after losing 42% in 2008. Now hovering just above 8200, the index is about one-fifth of what it was in 1989 at the peak of Japan's stock-market bubble. (See pictures of scared traders.)

Many factors are dampening investors' enthusiasm, including recession-smitten corporate profits and the uncertain prospects for economic recovery. "If you believe that corporate profits have no chance to rise in the next two to three years, then you could argue that stock prices are still too expensive," says Masaaki Kanno, chief economist at JPMorgan Securities in Tokyo. "More importantly, you could argue that it's too risky to hold the stocks." Kanno says people have lost a sense of what's fair value for financial assets, including stocks and other risky assets; they prefer time deposits, risk-free investments and cash. "Unless investors can have a positive outlook on corporate profits, there is no hope that stock prices will go up," Kanno says.

The Nikkei hit rock bottom on Oct. 27 at 7162, and some of the more bullish market analysts say it won't see that level again. But as corporate profitability continues to plummet and the global economy worsens, stock-market analysts are waiting for a catalyst. Tsuyoshi Nomaguchi, strategist at Daiwa Securities in Tokyo, says Japan's stocks are not comparatively cheap but are in the "attractive zone," and once recovery measures in the U.S. take effect in the middle of 2009, Japan's stock prices will rise on anticipation of economic growth. "Japan is falling behind [other nations] in implementing political measures on the economy. Waiting for the recovery of the U.S. might be the only way for now," he says.

It's not just market analysts who are hoping for a Nikkei rebound. Japan has a unique vulnerability to negative stock-price momentum. Cross-shareholdings, a mainstay of traditional Japanese business practice in which companies hold shares of other firms to cement friendly relationships, make stock-price losses a broadly shared pain. Not only are Japan's megabanks involved in cross-shareholding; auto and electronics manufacturers like Toyota, Nissan and Sharp are too. Companies and financial groups own about 20% of the shares on the Tokyo Stock Exchange.

Japanese businesses and financial institutions, however, are in a good position relative to their foreign counterparts. Japanese companies have ample cash on hand at a time when cash and liquidity matter most. As mergers-and-acquisitions activity increases abroad, the appreciation of the yen (currently 90 to the dollar) can actually work in favor of Japanese businesses, making acquisitions more affordable as the market caps of their competitors decline. And banks, even with some financial constraints, are seeing lending increase, with growth of 3.7% in December from a year earlier. Positive news, to be sure, but not quite the stuff of a new bull market.

— With reporting by Yuki Oda

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