Road to full recovery likely bumpy

Nikkei tops 10,000 line, but investors still to be reassured on state of real economy

by Janice Tang

Kyodo News

Investors may have breathed a sigh of relief as the Nikkei stock index recovered briefly to the 10,000 line Thursday for the first time since the global financial crisis sparked a plunge last October, reflecting strong optimism that the worst of the recession is over.

But market analysts caution that while the downside for Japanese stocks may have proved to have become more resilient amid a diminished likelihood for another financial crisis, the road to a full-scale rebound remains rugged as investors seek more reassurance on the strength of the real economy.

Prime Minister Taro Aso hailed the Nikkei’s rise as a good sign for the nation’s economy, saying: “It is encouraging news. There have been some improvements in industrial production and leading economic indicators, so we have seen good momentum building up.”

Chief Cabinet Secretary Takeo Kawamura, the government’s top spokesman, also cited the success of economic stimulus measures as having contributed to the market’s recovery.

With the appetite for risk gradually recovering, market players who had remained on the sidelines, especially individual investors, have recently begun to trade actively again and have helped to improve market sentiment, brokers said.

“There is clearly plenty of liquidity out there and individual investors are now chasing after incentive-backed shares,” said Toshikazu Horiuchi, an equities strategist at Cosmo Securities Co.

Recent rallies on Wall Street have also helped to stabilize U.S. consumer confidence, analysts said.

“This in turn leads investors to think that perhaps we will soon see a rebound in U.S. household consumption, which is crucial for the revival of Japanese exports,” said Yutaka Takei, deputy general manager of investment research at Shinko Research Institute.

At the same time, many market analysts pointed out that stocks have risen mostly on optimism without sufficient supporting evidence of improvement in the real economy.

Japan’s economy in the January-March quarter contracted an annualized real 14.2 percent in terms of gross domestic product, the sharpest decline on record, according to revised figures released Thursday. Manufacturers posted their first-ever combined pretax loss and corporate capital spending shrank at a record pace in the same period, according to recent government data.

“The situation is severe when looking in the rearview mirror,” Hiroichi Nishi, equity division general manager at Nikko Cordial Securities Inc., said recently.

“But investors are believing in brighter prospects given, Finance Minister (Kaoru) Yosano’s recent remarks that the economy has emerged from the worst period in the first quarter and the Bank of Japan’s forecast that GDP will improve,” he said.

The Nikkei index has risen more than 40 percent since hitting its lowest closing level in over 26 years on March 10.

Given the massive economic stimulus measures implemented around the world, signs of a long-awaited recovery will almost certainly be seen as early as later this year. The question is how far-reaching and sustainable the results will be, economists said.

“One shouldn’t be too optimistic yet,” Horiuchi said. “After all, Japan’s domestic demand alone is not enough and a recovery would in the end depend on reviving exports to the United States. The key is whether U.S. consumers will resume spending once again.”

As shown in Thursday’s trading, in which the Nikkei sputtered to end in negative territory, the Tokyo market will likely continue to see fluctuations as investors turn their attention to corporate profit trends and wait to see if the economy will truly recover as anticipated around fall, the economists noted.

With the nation’s unemployment in April rising to its highest level in over five years, whether Japanese companies, especially blue-chip firms, will see better earnings than forecast for this business year will be a crucial factor for stocks to rise further beyond 10,000.

“We’re not yet in the phase of a full-scale climb,” said Yutaka Miura, a senior technical analyst at Mizuho Securities Co. “The uptrend since the March bear market low may continue through late July, but adjustments within a limited range will likely continue through next spring.”

Uncertainties abroad, notably lingering concerns over the long-term impact of General Motors Corp.’s failure on U.S. employment, as well as new jitters that rising interest rates and commodity prices may hamper a U.S. economic recovery, will continue to cast a shadow over investor sentiment.

“Until funds from foreign investors return to Japanese stocks on a constant and continuous basis, it will still be difficult for the Tokyo market to see a full-fledged upturn,” said Sanae Hitomi, an economist at Dai-ichi Life Research Institute.

Similarly, Mizuho’s Miura said: “Economic trends in the United States and China from now on will be key for Japan’s recovery. It’s still a rocky road ahead.”