Tokyo stocks set to languish as Europe crisis brews anew

by Kayo Mimizuka

Kyodo

As risk-aversion spawned by fresh concern over the eurozone sovereign debt crisis dominates equity markets, Tokyo stocks are expected to stay in the doldrums as markets abroad deteriorate.

In March, the Nikkei index climbed back above the 10,000 line for the first time in around seven months after the yen’s decline caused by the Bank of Japan’s surprising decision Feb. 14 to further loosen monetary policy.

However, buying momentum gradually lost steam amid rekindled concern about the U.S. economy and eurozone debt crisis after elections in Greece and France in May, with the benchmark Nikkei dipping below 8,800 on an intraday basis Wednesday, more than erasing all its gains since the credit-easing move.

“Triggered by the political uncertainty in Greece, public opinion across Europe is leaning toward antiausterity measures, which could further destabilize the situation there,” said Yutaka Miura, senior technical analyst at Mizuho Securities Co., expecting the Nikkei to fall as low as 8,500 in the near term.

Political parties in debt-laden Greece failed to form a coalition government Tuesday as they collided over the use of austerity measures the country had agreed to in exchange for receiving bailout funds, prompting Athens to hold a new election in June.

The political turmoil raised the specter of a Greek financial collapse and possible exit from the eurozone, which could in turn exacerbate the debt crisis and adversely affect the global economy.

Adding to uncertainties in Europe is France, where Socialist Francois Hollande was sworn in as president Tuesday. Some worry that his plan to renegotiate Europe’s austerity pact will lead to friction with key regional players such as Germany at a time when the eurozone is struggling to deal with its debt problems.

“The Tokyo market is fairly prone to being affected by events abroad. . . . Even if the Nikkei index does rebound, the 9,500 line would be tough unless market conditions overseas improve. There’s a long way to go before the index recovers to 10,000,” Miura added.

Brokers say uncertainty about developments related to Greece may keep global equities under pressure until June, when the election is set to be held.

Masatoshi Sato, senior strategist at Mizuho Investors Securities Co., said that while Europe’s woes will continue to weigh on Tokyo stocks for some time, the slide in equities has been mild because the market has already figured in negative news from the region.

“The worst situation would be contagion of the debt crisis to other European countries and the unraveling of the eurozone framework itself that could be caused by Greece’s possible withdrawal from the bloc. But if that can be avoided, the market’s focus may shift again” to positive factors toward summer, he said.

In the long run, some analysts forecast that the Nikkei will recover to around 9,500 or above 10,000 between July and August, noting that pessimism about the U.S. economy may be wiped out by improved U.S. indicators.

Shifting focus to the domestic economy, the earnings of many Japanese firms improved in the year ended in March, proving their resilience amid the yen’s historic appreciation and disruptions to supply chains from the massive flooding in Thailand.

Although major exporters, including Panasonic Corp. and Sony Corp., suffered huge net losses last year, many are expected to experience V-shaped recoveries in the year to next March.

“The corporate earnings of Japanese firms rebounded more than we expected . . . but that factor has been ignored by the market as external environments unexpectedly deteriorated,” said Toshikazu Horiuchi, equity strategist at Cosmo Securities Co.