Bumpy ride for the Nikkei

JAPAN'S benchmark stock index may fluctuate sharply this week on hopes that the US will move to avert a slowdown, compete with fears that a strong yen and weak domestic economy will undermine corporate profits.

Exporters such as Sony may get a boost if Wall Street keeps cheering the unexpected interest rate cut by the Federal Reserve. But investors doubt that a bank rescue plan will bolster the finances of Sumitomo Bank and other lenders - and say the outlook for domestic industry is uniformly bleak.

"If the rate cut proves to be good enough for American investors, it'll reassure the market here," said Yoshio Inamura, at Tokyo-Mitsubishi Asset Management, who expects the Nikkei to swing between 12,500 and 13,500. "But with more downward earnings revisions on the way and a lot of foreigners looking to get out, we're looking at a very a bumpy ride."

Bonds are likely to be little changed as concern that the approval of the Y60tr ($518bn) bank reform plan may weigh on bonds is offset by the expectation that the Bank of Japan will follow the Fed in cutting interest rates.

"The next move by the BOJ will either be no change or a cut, so interest rates will not rise for the near future," said Keiichi Tsukuda, fixed income manager at Taiheiyo Securities.

Last week, the benchmark government bond yield rose 7.5 basis points to 0.865 per cent. However, some analysts said that easing by the Bank of Japan may not be immediate.

"Now that injection of public money into banks look likely, reform of the Japanese financial system will get underway in earnest in November, and the Bank of Japan may try to ease at that time," said Masuhisa Kobayashi, a fixed income strategist at Merrill Lynch Japan.

The Nikkei 225 index this week rose 3.1 per cent, to 13,280.54 last week. Sony and Honda Motor, both of which rely heavily on US sales, are likely to follow the pace set by Wall Street. "The rate cut will stem the potential for an American. recession, leaving room for (Japanese) auto and electronics firms to sell to US consumers," said Robert Reiner, managing director at Bankers Trust.

Still, investors worry that gains will be limited if the yen extends its record gains against the dollar - a prospect that threatens to wipe out exporters' windfall profits. Copyright: IOS & Bloomberg

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