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In June, Japan’s stock market suffered direct hits from the three concerns that were depressing stock prices in the United States — dismal corporate earnings, shady corporate accounting and the specter of terrorism.

As a result, Japanese stock prices, which until that time had been showing a relatively negative correlation to U.S. stocks, fell in line with those on Wall Street.

The drop became especially rapid after mid-June, reflecting the market’s disappointment over the government’s additional antideflation measures, which included proposed tax reforms.

Although U.S. stock prices have more or less factored in such items as poor corporate earnings, fears linger over the possibility of a terror strike to coincide with Independence Day and doubts over the credibility of accounting stemming from the improper bookkeeping at Enron Corp. and WorldCom Inc.

However, the Nasdaq Composite index has hit a new five-year low, and the Dow Jones industrial average is approaching its lowest point since the September terrorist attacks in the U.S. This indicates that in terms of valuation, U.S. stock prices have just about hit bottom.

If there are no major incidents on July 4, both the Japanese and U.S. stock markets can be expected to stage a strong rebound.

For Japanese stocks in particular, both macroeconomic and microeconomic fundamentals are likely to play an important supportive role, although negative external factors still exist.

Both the industrial output index released on June 28 and the Bank of Japan “tankan” business sentiment survey released Monday were much better than predicted and gave credence to the view that the economy is recovering.

I believe that the unexpected fall in stock prices last month was due to the very sudden stock market drop in New York, the rebalancing of corporate pensions and the negative economic effects of the World Cup soccer finals. As such, Japanese stock prices should recover in July.

In the first half of July, the bellwether Nikkei average of 225 issues will probably move roughly between 10,200 and 10,800, while rising to levels above 11,000 in the latter half of the month as companies release their earnings figures for the April-June quarter.

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