Originally created 05/10/04

Investors flock to Japanese stock market on recovery hopes



TOKYO -- Shunned by investors for more than a decade, Japan's stock market is regaining its reputation as a place to make money.

The Tokyo Stock Exchange's major index, the Nikkei Stock Average, has rebounded 60 percent in the last year from a 20-year low. Investment managers are calling Japanese stocks a hot pick. And companies are seeking business from returning traders - including an online brokerage that's renting out trading terminals to the growing ranks of individual investors.

The reviving interest in stocks follows signs that the Japanese economy is showing some real vigor for the first time since the early 1990s, having grown at a robust annual rate of growth of 6.4 percent in the final three months of 2003, the best performance in 13 years.

"The optimism is well-founded," said Richard Jerram, chief economist at ING Securities in Tokyo. "You can find a variety of reasons to be positive on the equity market."

The upbeat assessments come from many parts of the financial community. The government says business sentiment for the January-March period was at its highest in 15 years. Recent reports from the World Bank and International Monetary Fund show corporate restructuring and surging exports could be nudging Japan toward a sustainable recovery.

In one glowing report in April, global fund managers surveyed by U.S. investment bank Merrill Lynch said Japanese companies now have the best earnings prospects in the world. Of 273 managers questioned, 38 percent said they would like to increase their investments in Japanese stocks.

"Japan now vies with Emerging Markets as the most undervalued equity market region in the world," the report said.

The Tokyo stock market hasn't heard such praise in a long time.

During the booming economy of the 1980s, fortunes were made in Japanese equities. But that was before the speculative bubble burst and the market lost two-thirds of its value. The Nikkei, which peaked at 38,915.87 points on Dec. 29, 1989, finished trading in Tokyo Thursday at 11,571.34.

No one expects to see the Nikkei approaching its high anytime soon, but economists say the signs of recovery are more solid than they have been in years.

Jerram said improvements in banks' balance sheets, which had been saddled with huge, non-performing loans after the end of the bubble economy, set this rebound apart from earlier false starts.

"There's the possibility that this becomes more than just a recovery of the type we've seen before," he said.

Major banks reached the March 31 end of the fiscal year without the threat of financial crisis and possible government bailouts commonplace in previous years. Their shares have also soared: Mizuho Financial Group rose nearly 10 times and UFJ jumped nearly eight times from record lows set last April.

Other companies reporting their financial results recently have also marked solid earnings across the board, including telecom company KDDI Corp., Nippon Steel Corp., Honda Motor Co. and electronics giant Matsushita Electric Industrial Co.

The upswing has brought players flocking back to the market - in particular, individual investors. According to the Tokyo Stock Exchange, individuals were behind 42 percent of all stocks traded on the country's top three stock markets in the first week of April, easily outstripping foreign investors largely credited with prompting the recent boom.

The return of individuals investors is notable in a country where people have tended to look upon stocks as a gamble. While Japanese have set aside the equivalent of $12.96 trillion in personal financial assets, they have tended to funnel that money into savings accounts and other investments deemed more stable.

Their renewed confidence in the market is creating its own business opportunity.

Online brokerage Traders Securities opened a trading space targeting individual investors this month. Nestled in the top corner of a soaring high-rise, 46 booths where transactions can be made at private terminals are available for rent starting at $650 a month.

"Japan still has a lot of cash-rich people," said Konosuke Zen, the project's chief executive. "The elderly with big savings, housewives - they have the time, money and potential interest in trading."

Zen concedes, however, that these people may also be most the likely to bolt en masse if the market tips downward.

There are reasons to believe that may still happen, some say.

Deflation, a crippling downward spiraling of prices that cuts into corporate profits and personal paychecks, continues; corporate restructuring has not fully sunk in among smaller-sized firms; and the economy remains heavily dependent on exports sustained in part by the government's weak-yen policy.

The surge in optimism could in fact be a warning itself.

"It's actually quite a negative development when people say they're very optimistic on the market, said Equity Strategist Alexander Kinmont at Nikko Citigroup. "It means all the people who want to buy the market have already bought."