Tokyo stocks in July felt the brunt of the shock waves that hit the New York market and the Nikkei average fell below 10,000, a level long considered solid.

Issues especially hard-hit were internationally popular firms Toyota Motor Corp. and Hitachi Ltd. as they were unloaded by U.S. mutual funds.

It is estimated that total cancellations during the two-week plunge came to roughly $40 billion, far exceeding the $29.5 billion that flowed out of the funds after the Sept. 11 terrorist attacks. It is also believed that some $1 billion, or 120 billion yen, of Japanese shares were converted into cash during this time.

While we need to continue monitoring external factors such as New York stock prices and foreign-exchange rates when forecasting August market performance, it is also likely there will be an acceleration in the dumping of cross-held shares.

Analysts estimate that 1 trillion yen worth of such shares will flood the market in the April-September period, but only 270 billion yen has been confirmed in the three months to June. Such shares are usually sold in February and August — one month before most firms close their books in March or September.

Companies are currently releasing their earnings reports for the April-June quarter, and firms that include Sony Corp., Honda Motor Co. and NEC Corp. are showing strong results. This indicates there is still credibility to the assumption that such firms will post a strong recovery in the current business year.

Although it is common for the price-to-earnings ratio to rise during an economic recovery, the ratio has fallen to 22 from 28, compared with the 30 for the S&P 500 in the U.S.

Thus, for now, the stock market will likely see a tug-of-war between a Japanese economic and corporate upswing, and New York market instability and a decrease in cross-shareholdings.

The Nikkei will probably stay in the 9,500-11,000 range in August, during which time the main players may be individual investors. Thus small-capital stocks are expected to do better than large-capital ones, and issues with singular strong points may be more popular than generally well-performing firms.

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