After a year that saw share prices dive to 19-year lows, the Tokyo stock market is likely to see further turbulence in 2003, with some market watchers suspecting the Nikkei average could slip below 8,000.

As it stands now, the Nikkei’s fall to the low- to mid-8,000 range last year left investors with heavy unrealized losses in their portfolios.

Individual investor Tetsuji Fujii, 66, said he was shocked by share price falls that swelled latent losses in four stock investment trust products he bought two years ago to some 20 million yen.

The 225-issue Nikkei Stock Average moved above 13,000 in early 2001 — when he invested 10 million yen in each product — before dropping to around 10,500 in December 2001 and around 8,500 late last month.

Hit by a slew of U.S. accounting scandals and jitters over bad loans at Japanese banks, the Tokyo market saw some new records last year, with the Nikkei briefly sliding to 8,197.22 on Oct. 10, its lowest since March 1983.

The bellwether also registered a nine-day losing streak beginning Dec. 4, its first since mid-November 1991.

“It was a nightmare,” said Fujii, a retiree who works at an Osaka textile company on a part-time basis due to his slumping investment. “But I have no plans to sell (the trusts) at lower prices.”

Despite Fujii’s desire for a full-scale rebound in share prices this year, market participants suspect Japanese stock prices have not yet hit bottom, citing concerns over deflation, the financial system and a looming war in Iraq.

Analysts and strategists predict the Nikkei will move between 8,000 and 12,000 this year.

But some said it could sink below 8,000 if fears arise over a possible financial meltdown ahead of the March book-closing for fiscal 2002 or the envisaged U.S.-led war against Iraq drags on after a possible start in February.

Stocks could also be capped if tensions grow with North Korea over its nuclear development program.

Along with individual investors, institutional investors, such as banks and life and nonlife insurers, voice hope of a strong rebound in share prices this year.

Banks are pressured by inflating latent losses on their massive shareholdings and bad loans and are finding it difficult to keep their capital adequacy ratios at appropriate levels.

“Without asset deflation easing, it will be hard for us to make ends meet ahead of the March book-closing,” said an official at one of Japan’s four major banking groups.

Still, the official said there is no possibility the bank will require a transfusion of taxpayers’ money to bolster its capital base.

Despite the murky outlook for the first quarter, brokers said share prices will likely start climbing in April, buoyed by an expected recovery in U.S. shares.

Many expect Wall Street to gather steam after the new economic team under U.S. President George W. Bush unveils in January a stimulus package worth $300 billion featuring large-scale tax cuts.

Also drawing the market’s attention is who will replace Bank of Japan Gov. Masaru Hayami, whose term expires March 19.

“Foreign institutional investors will focus on the new BOJ governor, Japan’s banking sector and the U.S. economy when deciding whether to buy Japanese shares,” said Hidenao Miyajima, a strategist at Commerz Securities (Japan) Co.

“If the new BOJ chief is in favor of adopting an inflation target, they will buy Japanese equities.”

Inflation targeting — adjusting the supply of money to attain a desired rate of inflation — has only been used by countries experiencing runaway inflation. If the BOJ adopts the policy it would mean printing massive quantities of yen.

A new securities tax system, which took effect Wednesday, may lure individual investors into the market as it cuts capital gains taxes to 10 percent, from the previous 26 percent, and dividend taxes to 10 percent, from the previous 20 percent.

But what will be most closely watched is whether Prime Minister Junichiro Koizumi’s government takes effective measures to stem deflation. and put the economy in order, a prerequisite to stoking stock transactions, brokers said.

“We are aware that no one can bring deflation under control in a few months,” Osaka’s Fujii said. “But Mr. Koizumi should bear in mind that the public will shoulder further losses unless the government turns around this economic deterioration.”

“It’s not only investors that suffer,” said Masatoshi Sato, senior strategist at Mizuho Investors Securities Co. “We may lose our jobs if we continue to suffer from shrinking brokerage commissions stemming from slumping share prices and low trading volumes.”

All seven midsize brokerages in Japan, including Mizuho, chalked up net losses in the first fiscal half to September.

Sato predicts that hopes of policy changes by the Koizumi administration or its successor, together with hopes of corporate earnings gains through 2004, will lift the Nikkei to around 11,000 by the end of 2003.

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