Tokyo Market: Strong yen threatens export profits

JAPANESE stocks will likely be mixed on concern the market's climb last week to levels last attained more than a year ago isn't justified by prospects for corporate earnings. Bonds should be little changed after the Bank of Japan kept its lending rates near zero, making it profitable to buy debt with borrowed money.

The benchmark Nikkei index rose 3.5 per cent to 16,855.63, completing its first five-day rally since October and extending to almost 22 per cent its gains on the year. It even crossed 17,000 on Friday for the first time since 30 March, though it closed lower.

Investors say the Nikkei probably won't be able to maintain that pace because domestic investors will be tempted to sell Sony, Honda Motor and other foreign favourites that have led the rally amid strong overseas buying. "In the last two or three months, the market has overshot," said Garry Evans, strategist at HSBC Securities Japan. "At this level, there are going to be some profit-takers." He sees the Nikkei entering a "period of consolidation", trading in the 16,000 range.

One obvious target for profit-takers may be Sony. Its shares have risen 42 per cent since the beginning of March, and are trading at around 32 times estimated group earnings for the fiscal year just ended - up from 24 times at the start of last month.

Investors worry that a strengthening of the yen may threaten profits at even Japan's most competitive exporters.

Shares in Honda fell 8 per cent at the end of the week after reports that profit may fall 10 per cent in current year if economic recovery results in a stronger yen.

But investors stress that they expect the market to catch its breath - not to take a beating. That's because global fund managers, who were net buyers of Japanese stocks last month by the biggest margin in seven years, will likely continue their push back into what has become one of the world's best-performing markets in 1999.

They're counting on cost-cutting efforts by Japanese companies improving profits even if the economy remains in its current doldrums. "I think there's going to be some more positive surprises on restructuring to come," said HSBC's Evans, who said he is forecasting the Nikkei to climb to 19,000 by the end of the year and to 20,000 by March 1999. "The possibility is that corporate earnings are going to delink from the economy - we think the economy is still in pretty bad shape."

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