Tokyo market stuck
Very bottom trading range
Till cherry blossom?

Our principal specialist Japan adviser –a mid and small cap value manager, an area that has been under more pressure than large caps lately (the chart of the Second Section is at a 20 year low)- wrote to us at the end of December:

It has been the worst year for Japanese equities since modern records began in 1950 with the market falling 41.8%. However the strength of the yen has offset the decline to a significant degree.

Third quarter GDP was revised down to an annualised decline of 1.8% from the original fall of 0.4%. In November exports, which had been relatively supportive, suffered a record drop of nearly 27% on the year. As a result Japan has had a trade deficit, a rare occurrence, for two months running. Industrial production fell over 8% during the month. The Tankan showed sentiment at large manufacturers to be at a seven year low - perhaps to be expected as Toyota announced that it will report its first ever operating loss.

The policy response has been encouraging. The BOJ symbolically cut rates further to 0.1% but more importantly announced other measures including plans to buy commercial paper for the first time. On top of the supplementary budget of Y4.8tn announced by the Cabinet, the MOF announced a spending budget of Y88.5tn, an increase of nearly 7%, for the year beginning April 2009. The government is making at least Y20tn available to buy shares held by the banks to boost their capital, and to support the stock market. It has also directed the Ministry of Land, Infrastructure and Transport to introduce emergency measures to support the ailing real estate market, including the REITs, as two more developers succumbed to bankruptcy.

Many companies are announcing downward revisions to full year targets and restructuring measures are being taken almost across the board. Nevertheless the number of share buybacks reached a record high of 294 including many of our companies such as Fujifilm, Glory, Nippon Shokubai and Sumitomo Warehouse. Companies are continuing to merge to achieve economies of scale. Nippon Oil and Nippon Mining are combining and will have a 30% share of the oil refining market while reports suggest that Mitsui Sumitomo, Nissay Dowa and Aioi Insurance are in talks to create the largest non-life insurance company. Share prices responded positively. Panasonic has put forward plans to purchase a majority stake in Sanyo Electric. Daiwa House is buying some of the assets of bankrupt real estate companies and Fujifilm is buying Empiric Systems a US based maker of radiology information systems.

Changes at the corporate level have meant that the number of companies listed on TOPIX has declined at a time of record low valuations. The household and corporate sectors are heavily exposed to cash and bonds and the government is looking to encourage equity investment by maintaining existing tax incentives and introducing new ones. Individuals were net purchasers of equities for the first time since 1990.