Here is a more skeptical article from the 1992-93 Nikkei bear market rally.
The article was published in the May 15, 1993 of the Economist. I'll post my
comments in the next commentary.
A bear in bull's clothing. (Japan's stock market)
Brief Summary: Stock prices on the Tokyo Stock Exchange are rising, due in
large part to Japan's policy of shoring up the market to help Japanese firms
raise capital. Since Mar 1993, the Nikkei average has risen by more than
one-sixth, despite Japanese firms' lower earnings reports.
AS AN example of crowd psychology, it is instructive. Barely three months
ago, deep gloom prevailed in Tokyo. Now, in a dramatic shift in sentiment,
investors seem to have turned almost universally bullish on the Japanese
stockmarket. Some investors, anyway. Foreign fund managers and Japanese
retail investors buying on margin have made most of the net share purchases in
recent months (along with government-controlled savings institutions). They
have one thing in common: they are playing with other people's money.
This new confidence rests on the now widely held assumption that the
Japanese government will do whatever it must to support share prices until
company earnings rebound. Many foreign investors profess far-fetched hopes
that profits will double in the year to March 1995, though there is minimal
evidence yet of any pick-up in the Japanese economy. Most people concede
that the current fiscal year (to March 1994) will see the fourth annual decline in
earnings in a row. While firms wait for their luck to turn, investors are doing
their best to ignore both the horrible results which companies have just begun
to announce for last year and the recent sharp decline in bond prices.
Government bonds now yield 4.5%, not a bad return given that inflation is just
over 1% and the yield on shares just under it.
The stockmarket bulls looked more plausible a couple of months ago. Then,
the government's determination to support the equity market became clear.
Managed press leaks about a pending increase in telephone charges doubled
the price of shares in NTT, the Tokyo market's leading company. This lifted
investors' spirits immensely, as well as filling well-informed politicians'
campaign coffers. Since early March, however, the Nikkei share average has
risen by more than 3,600 points, to 20,533 on May 13th. The stockmarket is
now extremely expensive; shares are selling at almost 90 times prospective
earnings for the year to March 1994. Those bidding up share prices these days
must believe in an endless supply of future suckers. That is seldom wise.
Yet the Japanese government does, at last, seem to have fixed on supporting
the stockmarket as an important way to revive the economy. This makes some
sense. As the market rises, so does banks' capital, for it includes part of the
unrealised gains on banks' shareholdings; up, too, goes banks' ability to lend.
And higher share prices should also help companies, now suffering from a
cash-flow squeeze, to raise money--both by selling the shares they own in
other companies and by issuing more shares of their own. New equity issues
have been suspended in Japan since the spring of 1990, in an attempt to
prevent new supply from depressing prices further. The informal ban will need
to be lifted--perhaps after the sale of state-owned Japan Tobacco and JR
East.
The government's bet seems to be that by rigging the stockmarket it can lure in
enough suckers to help companies raise massive amounts of equity, rather as
America's bull market has helped companies to do there. Who will these
suckers be? Japanese banks and life insurers remain bearish. They are keen on
neither the market's fundamentals nor the prospect of adding to their equity
exposure at current giddy prices. Only last autumn big life insurance companies
were looking at net losses on their long-term shareholdings. Neither they nor
finance-ministry officials want to see a repeat of that scary event.
Japanese companies too will remain net sellers of shares. The deterioration in
their cash flow is one of the biggest problems now facing Japan's stockmarket,
along with more familiar woes like banks' bad debts and distress in the
property market. Firms' financing needs are greater than at any time since the
1974 oil shock. Smithers & Co, a research boutique, estimates that this year
the corporate sector, excluding banks, will have to find new net external capital
of YEN 40 trillion ($45 billion), equal to around 8% of GNP. In 1987 firms'
financing needs amounted to only 2.2% of GNP.
So far, firms have dealt with the problem partly by drawing down their cash
reserves. Their cash holdings declined at an annual rate of 7% in the last three
months of 1992. Meanwhile, another source of cash--bank borrowing--has
become steadily less attractive. In recent years, desperate to boost their
operating profits and absorb bad loans, banks have begun charging corporate
borrowers the full whack. Their lending rates have not fallen in line with their
funding costs; banks' margins have widened by about two percentage points
since early 1991. Smithers calculates that to finance a corporate-sector deficit
of YEN 40 trillion at the current high corporate-borrowing rate of 5% (almost
4% after inflation) would cost YEN 2 trillion a year.
With cash reserves dwindling and bank credit expensive, companies will
accelerate their already steady selling of shares. Equities yield about 3.5
percentage points less than bonds. And the higher the stockmarket rises, the
more attractive it will become to dump shares. The continued pressure on
companies' cash flow may well accelerate the gradual unwinding of Japan's
complex web of cross-shareholdings. In the meantime, since companies, banks
and life insurers own about two-thirds of the Tokyo stockmarket, share prices
are supported almost entirely by fickle foreigners, margin investors and, of
course, the government.
Perversely, by attempting to boost shares in so crude a fashion, Japan's finance
ministry may have succeeded only in prolonging the bear market. Had the
stockmarket been left to its own devices and allowed to find a clearing price, it
might well be on its genuine way up now. As it is, the thundering herd is likely
to prove a skittish lot.
"The point at which a competitor is pursuing the best possible strategy, given the strategies of the other participants" - John F. Nash
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