On the other hand, MSCI Japan was up by 1% from the start of the year until August 23rd while the world average was down by 15%. Clearly the Tokyo stockmarket, compared with European markets, is much more influenced by local factors and much less by America.
This spring the yen rebounded sharply against the dollar. After trading in the ¥127-¥135 to the dollar range for the five months until the middle of Ma
y it has fallen below ¥121 since the end of June. A falling dollar makes Japanese exporters less competitive and the country’s shares more expensive relative to American competitors.
Investor sentiment
But it was local news, especially from the financial sector, that scared investors during August. For example, the Financial Services Agency published new data on non-performing bank loans as of March, showing an increase by 22% to ¥52.4 trillion (£288 billion). The cause of the steep increase was tougher loan classification standards. But these have only been applied to the larger borrowers at the bigger banks so far which means that further increases are likely.
Political considerations are also more important than in other stockmarkets and disappointment at the lack of financial reform remains. Junichiro Koizumi, in over a year as prime minister, has not met the promises he made when he was elected. On top of this is the risk of an American attack on Iraq which would probably disrupt Japan’s oil supply.
Outlook
A substantial piece of good news is needed to revive the Japanese stockmarket. But the political deadlock and the weakness of the financial system seem insurmountable so the probability that Mr Koizumi will at last deliver his promised reforms looks small.
