After holding out for some time against market adjustments in the United States and Europe, Tokyo stock prices fell broadly Tuesday amid fears of contagion from this week’s tumble in New York share prices.

Bullish investors had counted on an economic recovery, improving corporate earnings and a pickup in the flow of money from public funds, but doubts remain about this scenario.

Recent economic indexes indicate that the Japanese economy has bottomed out and is on a recovery path. This recovery may be short-lived, however, as it is being led by an increase in exports after temporary inventory buildups in the U.S. Exports from Japan will begin to slow sooner or later as there are emerging signs that the rapid U.S. economic recovery in the January-March period was a temporary phenomenon.

Securities companies have forecast that corporate earnings in fiscal 2002 will grow between 40 percent and 50 percent over the previous year. However, a closer analysis shows that profits will grow mainly because companies will not need to register extraordinary losses and restructuring expenses in fiscal 2002, having booked them the previous year.

Extraordinary earnings apart, profits are expected to grow less than 10 percent.

Many exporters, expecting a rapid economic recovery in the U.S., are hoping for a steep rebound in earnings in the second half of the current fiscal year.

However, as the U.S. economy is only likely to grow between 1 percent and 2 percent, these projections seem overly optimistic.

Many market participants welcome share purchases by public funds as a step to improve the balance of supply and demand. But investors are naive if they expect stock prices to keep rising in the medium-term on the back of purchases by public funds.

Under the circumstances, it is fair to say that Tokyo stocks, standing on extremely risky fundamentals, are oddly strong nowadays. Along with Prime Minister Junichiro Koizumi’s weakening power base and receding hopes for structural reform, the stock market is likely to experience adjustments sooner or later. Investors should take a cautious stance without becoming imprudently optimistic.

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