Investors will continue to distance themselves from banks, construction companies and other debt-burdened industries after being shaken by the failure of property brokerage Daiichi Corp and a chorus of gloom from managers and foreign credit analysts. "The market is worried that banks, builders and real estate companies still have skeletons in their closets," said Shigemi Nonaka, a managing director at Sakura Asset Management. "More earnings cuts or a bankruptcy could send the index tumbling."
The benchmark Nikkei index last week fell 7.3 per cent to 15,517.78. Bonds are likely to fall further on concern that the government is about to spur the economy after Moody's Investors Service said it may cut the nation's credit rating. Bonds plunged on Friday on the news, driving yields to six-week highs. Moody's changed its outlook for Japan's debt to "negative", given the government's inability to revive its sinking economy. "The question is whether foreign investors will sell bonds next week, following today's sell-off," said Keisaku Ujihara, investment manager at Sanwa Asset Management.
A strong dollar is weighing on share prices of banks and domestic industries. "The exchange rate will be the number to watch," said Ichizo Yamauchi, a director of research and planning at Kokusai Asset Management. "Recently foreign investors have accounted for almost one-fifth of daily trading volume, and with the dollar threatening to cross the 135 yen threshold, incentives for them to sell are very high."
Still, exporters may rise as the yen's depreciation will increase profits on sales to a US market that remains healthy. Such gains may keep the benchmark index fluctuating between 15,000 and 16,000 this week, investors said.
Investors stress that share prices will reflect expectations that the government aims to add tax cuts and other measures to an economic stimulus package unveiled last week.
"With prospects for the economy and corporate earnings as bad as ever, the market will continue to rise and fall along with hopes for government policy," said Mr Yamauchi.
The government is likely to extend the cut in personal income taxes implemented last year. That question will move to the top of the political agenda next week, when the budget for the year beginning 1 April is expected to go through.
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