While Tokyo stocks continue to fluctuate wildly, some market participants are saying that stocks have bottomed out and have started an upward surge, following the Bank of Japan’s effective return to a “zero-interest-rate” policy and commercial banks’ accelerated disposal of bad loans.

Although the start of March saw the Tokyo market start to fall sharply, fiscal yearend factors have helped it firm since the middle of the month.

It is premature to say, however, that the market has bottomed out because the renewed zero-rate policy should have practically no effect on economic fundamentals.

The economy’s money supply appears unlikely to grow. An increase in bank loans is not expected at a time when banks are reluctant to lend to those companies that are eager to borrow, while the firms to which banks want to extend loans have no funding requirements.

Banks are expected to boost their writeoffs of bad loans, as was pledged by Prime Minister Yoshiro Mori in his meeting with U.S. President George W. Bush in March.

Aggressive writeoffs of problem loans must help Japanese businesses rationalize their operations if they can contribute to Japan’s economy and stock market. In other words, inefficient firms will go under as a result.

It is highly questionable, however, whether the Liberal Democratic Party can pursue a measure of this kind.

While the construction, real estate and retail sectors are littered with inefficient companies, they are important sources of votes for the LDP.

The LDP is likely, therefore, to avoid bold steps to encourage writeoffs of bad loans ahead of the July Upper House election.

Under the circumstances, a package of emergency economic measures to be introduced shortly by the ruling coalition is expected to feature only partial waivers of debts in respect of bad loans.

With these factors in mind, as well as the absence of positive indicators for Japan’s economic future, it is fair to say the stock market will move within a boxed range for the time being.

Medium-term upward trends are unlikely to occur until the second half of this year, when the U.S. economy is expected to start evidencing brighter prospects.

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