Having slumped to 9,420.85 on Feb. 6, the 225-issue Nikkei average has been hovering around 12,000 in recent days.

The rally was fueled by the government’s antideflation package — and its move to tighten controls on short sales in particular.

The package reflects the government’s determination to forestall a March crisis, which many had feared would arise from stock price falls causing unrest within the financial system.

There is no denying that the current market rebound is attributable to a technical factor, namely the coverage of short positions. Nevertheless, investors should not overlook the gradual improvement of economic fundamentals underpinning the rally.

The stagnation on the stock market has stemmed from the raft of bad loans held by the nation’s banks, as well as weak economic activity and corporate earnings.

To counter Japan’s deflationary risks, the government will seek to put an end to the bad-loan problem and stabilize the financial system — mainly via strict inspections of the quality of bank loans extended to heavily indebted major companies.

In addition, the government is expected to carry out additional antideflation measures. It will seek to stimulate demand via tax reforms, deregulation and monetary easing.

The stock market will be particularly stimulated if the measures include a raise in the nontaxable limit on gift money bestowed for home-purchasing purposes and tax breaks to stimulate real estate trading.

The domestic economy remains in the doldrums, with the gross domestic product having contracted for the third consecutive quarter in the final quarter of 2001.

It is fair to say, however, that the economy has pulled out of its worst period in view of advanced inventory adjustments and a faster-than-expected U.S. recovery.

Corporate earnings are expected to improve drastically in fiscal 2002 through March 2003 thanks to the yen’s depreciation and the effects of the restructuring drive.

Although the stock market is likely to experience short-term adjustments following its recent rebound, it is expected to maintain its upward trend until June on the improvement of economic fundamentals and the supply-demand situation.

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