TOKYO – After more than a decade of decline, Japanese stocks are finally staging a comeback.
The Tokyo Stock Exchange's benchmark Nikkei index has shot up 23 percent since May, and hit consecutive four-year highs in recent sessions, including yesterday, when it closed above 13,700 points for the first time since May 2001. The big question is whether the recovery can be sustained or will evaporate like those of the 1990s.
This time, analysts and investors say there are important reasons to be optimistic.
Japanese stocks lost about 80 percent of their value between late 1989 and 2003, as the world's second-largest economy struggled with weak corporate earnings, a burst real estate bubble, mountains of bad debt at the nation's banks and rising unemployment.
But the Nikkei 225 index, which tracks Japan's most prominent companies, has been rallying since this summer.
"This is fundamentally different from the temporary recoveries you saw in the 1990s," said Richard Jerram, chief economist at Macquarie Securities in Tokyo. "Those post-bubble problems have worked through the system."
The most important contrast is Japan's improved economic health.
Annual economic growth was recently upgraded to 3.3 percent from an earlier estimate of 1.1 percent. The banks' bad loans are largely behind them, and land prices are rising for the first time in 15 years.
Unemployment dropped to 4.1 percent in June, its lowest since 1998, while rising wages have spurred consumer spending and some companies have increased investment.
Meanwhile, Prime Minister Junichiro Koizumi is fresh off a landslide election victory and promising to push ahead with sweeping financial reforms that could further invigorate the economy. He plans to start with privatizing Japan's postal savings and insurance system, which analysts say will free up some 330 trillion yen ($3 trillion) for possible injection into the stock market.
The news has sent stocks soaring as well as expectations.
UBS Securities raised its target for Japanese stocks last week, predicting the Topix index, which includes all issues on the Tokyo exchange's first section, to hit 1,503 points in the fiscal year starting in April. Morgan Stanley said in a report Monday that the Topix is on course for 1,600, although it didn't give a time frame.
The Topix has climbed about 22 percent this year and closed up 0.7 percent at 1,421.83 yesterday. The Nikkei added 213.56 points, or 1.58 percent, to 13,738.84, its highest finish since May 29, 2001.
Merrill Lynch chief economist Jesper Koll said last month that the Nikkei could rocket to 25,000 points by 2008, assuming Japanese corporate earnings per share grow 15 percent a year.
Shares linked to the domestic economy, such as banks, real estate and retailers, have gained most in the recent rally.
But exporting companies such as auto and steel makers have risen on hopes that they will benefit from the yen's 10 percent decline against the dollar this year. A weaker yen makes Japanese products cheaper overseas, boosting sales.
Foreigners have been the biggest buyers as they add Japanese shares to their portfolios.
But Seiki Orimi, a strategist at UFJ Tsubasa Securities in Tokyo, warned that the recent spike could trigger profit taking.
"It's very hard to say whether to buy more at this level," Orimi said. "This advance was very quick, so the market needs a correction."
Other risks include a slowdown in economic activity in the United States or China, Japan's main export markets, or a further increase in oil prices. Japan imports nearly all of its oil, and business leaders fretted when crude-oil prices peaked briefly at $70.85 a barrel Aug. 30, after Hurricane Katrina made landfall in the United States. Crude has since retreated, and was below $64 a barrel yesterday.
But analysts say improved balance sheets at Japanese companies should underpin a long-term uptrend.
Return on equity at Japanese companies, a measure of profitability watched by investors, was only about 5 percent during the 1990s but has climbed to 9.5 percent today after years of painful restructuring that entailed massive losses, job cuts and the selling-off of assets, said Chisato Haganuma, a strategist at Nomura Securities in Tokyo.
Meanwhile, price-to-earnings ratios, a measure of how much a stock costs compared with how much it earns, have fallen to about 18-to-1 or 19-to-1 today from about 30-to-1 or 40-to-1 in the 1990s, meaning Japanese stocks are relatively good deal, he said.
Improved profitability is expected to bring down the ratio to 14.6-to-1 next year.
"Many people had a cautious view in the spring. But after the April-to-June period, the earnings results for this fiscal year were better than many people had expected," Haganuma said. "I don't recommend Japanese companies because of perfect management. I recommend Japanese equities because there is still much room for improvement."
