Tokyo market: A tale of turmoil and traps

JAPANESE STOCKS and bonds may be little changed this week, as banks fall on the concern that turmoil in Asia will leave them with more bad loans on their hands. At the same time, exporters are expected to rise as investors seek out safe havens in an economy that continues to struggle.

"We seem to be trapped in the 16,000 to 15,000 range," said Celia Farnon, a director at Nomura Securities International. "It's going to be hard to break through 16,000 with the economy as weak as it is.

The benchmark Nikkei 225 stock average fell last week 130.87 points, or 0.83 per cent, to 15,670. The broader Topix index slipped 0.71 per cent, to 1221.49.

Bond investors are concerned that prices can't go any higher after yields touched record lows in four of the last six trading days.

"There are people who feel the rise in bonds has been too fast, and a fall is due," said Keisaku Ujihara, an investment manager at Sanwa Asset Management. "And there are always investors buying on dips," he added.

In the past week, the benchmark government bond yield fell 4 basis points to 1.205 per cent. The yield touched a record low of 1.190 on Friday.

"Most can't see yields falling much more," said Naomi Hasegawa, an economist at Tokyo-Mitsubishi Securities. "But pension fund managers need to find a place to put new funds that come in around this time of year."

Banks and trading companies are likely to fall if another wave of political and economic turmoil sweeps across Asian markets. Rioting in Indonesia, a strike by South Korean car workers and Pakistan's detonation of five nuclear devices conspired last week to drag down the yen and other currencies, raising the spectre of defaults by regional borrowers.

"There's a lot of scepticism over whether banks haven't fully disclosed the extent of their exposure to the region," said Yoshio Inamura, investment manager at Tokyo-Mitsubishi Asset Management.

"There's even more scepticism as to whether they have set aside enough reserves to deal with a crisis."

Retailers and other domestic-demand-oriented industries are also expected to struggle after government figures indicated that Japan's economy is likely to weaken over the next three months.

Investors uncomfortable with the prospects for domestic recovery are likely to buy exporters such as Sony and Honda Motor, betting that a strong US economy will bolster profits.

Copyright: IOS & Bloomberg