Over the past month since Prime Minister Yukio Hatoyama assumed office, a controversial plan for a moratorium on debt repayments by small companies has hurt financial shares and uncertainty regarding the capacity of the new government has weighed on the stock market.

But while remarks by financial services minister Shizuka Kamei and Finance Minister Hirohisa Fujii have already sent reverberations through the stock and currency markets, most analysts remain hopeful for a smoother run once the fiscal 2010 budget is compiled and economic stimulus measures are put in place.

“While global stock markets have soared, Japan is the only one still lagging,” said Masatoshi Sato, a senior strategist at Mizuho Investors Securities Co.

“This appears to reflect uncertainties and jitters about the new government’s policies . . . and while the Cabinet is enjoying relatively high public support ratings, the response from the market has been rather tepid so far,” Sato said.

Market watchers were in unison in noting that the financial sector has suffered the most damage in the past month, largely due to Kamei’s push for the moratorium bill that will urge banks and other financial institutions to allow struggling small firms to delay debt repayments for up to three years.

The market also saw the dollar fall to a nine-month low against the yen and Fujii’s repeated remarks signaling tolerance of a stronger yen have weighed on exporter shares, as investors fret about the impact on exporters’ profits when repatriated from overseas, brokers said.

“It seemed like there was only a flow of negative cues while we have yet to see concrete measures on boosting domestic demand,” said Masumi Yamamoto, a market analyst at Daiwa Securities SMBC Co.

The key Nikkei index ended at 10,238.65 on Thursday, slightly below the closing level of 10,270.77 on Sept. 16, when the Democratic Party of Japan-led government was launched. It remains short of the year-to-date closing high of 10,639.71 marked Aug. 26, before the DPJ won the general election.

On a more positive note, Takafumi Horiuchi, a strategist at Mizuho Securities Co., said, “As long as the (fiscal 2010) budget is drafted by the end of the year and the government moves on to implement stimulus measures next year as scheduled, confidence in the new administration won’t be seriously dented.

“Right now negative incentives are in focus, but I think we’re gradually heading from negative impact to neutral,” he said.

Similarly, Makoto Haga, chief strategist at Monex Inc., said investors need not be overly worried as the DPJ, faced with pressure to win the House of Councilors election next summer, would “undoubtedly do whatever it can to ensure the economy is propped up.”

The market will be watching closely over the next few months for the actual implementation of measures to stimulate domestic demand, as well as more concrete steps on how Japan will meet its new target for the reduction of greenhouse gas emissions as pledged by Hatoyama, the analysts said.

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