The Tokyo stockmarket has outperformed the global average for two consecutive years. GDP growth of 2.4% in 2003 exceeded expectations and was way ahead of the consensus forecast of 0.7% made as recently as May.
The question now is whether economic growth can be sustained. After 13 years of sluggish growth punctuated by recessions many investors, both domestic and foreign, are understandably sceptical.
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But there are positive signs in recent statistics. Unemployment fell to 4.9% in December against 5.4% in May. And the ratio between the number of job offers and job applicants rose in December to the highest level for over a decade. Deflation, the persistent downward trend in prices of both goods and services, has eased gradually. Exports from Japan were 13% higher in volume terms in December than a year earlier while the trade surplus expanded by 40% over the same period.
A stronger economy in general does not by itself solve the main problem for the biggest sector in the Tokyo market: the banks. The scale of the non-performing loans, with roots in the financial bubble of the 1980s, is still unclear. Optimists point to official statistics which show that the volume is falling and that bank profits are growing sufficiently to cover the remaining losses in just a few years. Pessimists argue that official statistics understate the bad debt problem and point to the reclassification of loans done when Resona Bank was rescued by the government in May.
Waiting nervously
Investors are nervously waiting for indicators showing which side is correct. Both information from the banks themselves and news on reform of the banking sector will probably be released suddenly. Such action is necessary as the Tokyo market is highly sensitive to both the volume of bad loans and how they are handled.
Another reason for concern is the appreciation of the yen against the dollar. After staying between ¥115 and ¥120 in the first eight months of 2003 the yen has risen strongly despite record interventions by the ministry of finance. In January it purchased $67 billion (£36 billion) but the dollar still fell below ¥106. Fundamentally this matters less than a few years ago since Japanese companies have moved substantial amounts of production abroad but ¥100 is still considered a vital psychological threshold. If the dollar falls below ¥100 many fear a strong reaction in the stockmarket that could once again hurt the balance sheets of Japan's shaky banking sector.
Expectations of structural reforms, created by election promises in 2003, have also bolstered the market. Junichiro Koizumi, the prime minister, was reelected by the ruling Liberal Democratic Party in September while promises of economic reforms dominated the lower house elections in November. The result was a stronger position for the reformers but it still remains to be seen how many of the election promises will be realised
