At the other end of the spectrum, Japan is preparing a new budget to help pay for the job creation programme the government will announce on Friday. So bonds are likely to fall as further signs of a sluggish economy force the government to increase bond sales to finance public spending. "There is further downward movement to go as talk of an extra budget becomes more serious," said Xinyi Lu, chief strategist at Paribas Capital Markets. "Economic growth figures are going to be closely watched."
The Nikkei gained 2 per cent last week, its first week of gains in four, to close at 16,300.75 while the benchmark bond yield rose 15 basis points to 1.640. Yet in the absence of strong buying incentives - and with concern about instability in Asia, domestic joblessness and potential rising interest rates - interest shifted to the over-the-counter index, a trend that may continue. The Jasdaq jumped 10 per cent for the week, after a month of losses, largely on individual and broker buying. Internet-related megachips surged 19 per cent on the OTC market, and Obic, a computer issue on the TSE second section, climbed 13 per cent on Friday. "Companies on the broader index are the most vulnerable to rising US interest rates and the whims of foreign buying," said Tatsuo Kurokawa, at Nomura Securities investment information department. "The only activity we're likely to see is individual investors picking up small and mid-cap issues." While the government may allocate as much as Y10,000bn (pounds 51.2bn) to new programmes, some economists dismiss the plan as just throwing money at the problem, not addressing structural inefficiencies.
"The proposals indicate that policy makers believe they can support employment mainly by tinkering with the existing system, rather than through wholesale reform," said Ron Bevacqua, a Merrill Lynch Japan economist. "Banks misprice risk, corporations misallocate capital, and a convoy system-mentality stabilises markets and creates barriers to new entrants."
The need for a supplementary budget is expected to grow after next Thursday's GDP figures for the first quarter. Economists forecast the economy shrank 0.1 per cent in the first quarter of 1999, and will grow 0.2 per cent in the second.