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The Nikkei average on the Tokyo Stock Exchange has begun to take a downward path. Market participants, in particular foreign investors, are becoming cautious.

While investors were earlier buying shares as they tried to assess the prospects of the economy bottoming out and heading for a recovery, there is a growing mood that they cannot expect growth in capital investments in light of recent statistics on corporate activity and machinery orders.

There are few signs that consumer spending is on the rise, and some experts point out that, on the contrary, the level of spending per consumer is continuing to fall.

It is likely that the current uptrend in the economy will be short-lived, as corporations build up inventories only to a level that will not prompt them to boost their capital investments.

Uncertainty also hangs over the U.S. economy, on which Japan relies heavily for its own recovery. The earnings forecasts of American firms remain sluggish, and concerns over new terrorist attacks or the revival of the “twin deficit” have triggered moves for capital flight, putting U.S. stock markets on a bearish trend.

If the situation remains unchanged, the Nikkei average may not rise above the May levels for the rest of the year.

Tax reform appears to be the only remaining hope, but prospects also seem bleak here as well, with pressure from opponents of tax cuts in the ruling bloc even raising the specter of an increased tax burden.

If no improvement is seen on this point, investors will need to focus their strategies on individual issues. However, price corrections of discounted shares seem to have run their course, and indexes of shares on over-the-counter markets that normally receive scant attention have also moved downward following a recent spate of rises.

So are we left with no shares to buy?

Not necessarily. We see some firms that are trying to refresh their corporate culture under new presidents, or others embarking on true restructuring that goes beyond merely shrinking operations. Market participants should pay attention to companies that, even though their sales may not be rising, are enjoying larger profits through efficient management.

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