TOKYO MARKET: Stronger yen eats away at export prospects

JAPANESE stocks may be mixed this week, as investors - wary of a strengthening yen - move away from exporters toward companies likely to benefit from government steps to lift the economy.

Sony, Honda and other exporters, which have paced the 17 per cent gain by the Nikkei index since the beginning of March, may falter on concern that the dollar may extend its retreat against the yen. The dollar on Friday fell after Finance Minister Kiichi Miyazawa said the government may consider new tax breaks on investment.

That prospect is expected to give a boost to steelmakers and domestic industries suffering from slumping capital expenditure. With companies preparing to report annual results, fund managers are likely to limit their buying to those that have announced cost-cutting programmes and measures to improve profitability even if the economy remains in the doldrums.

"The blue-chip exporters have risen so far so fast that they're due for a breather," said Susumu Inada, chief investment officer at Tokio Marine MC Asset Management. "But with results around the corner, investors are going to be especially cautious about picking some of these domestic demand-oriented companies."

He expects the benchmark Nikkei 225 average to move between 16,400 and 17,200 this week. Last week it fell marginally, by 0.02 per cent, to 16,851.58.

Investors say 17,000 represents an important psychological barrier for the market. Staying above that level may be difficult, if the likes of Sony and Honda lag the market. They account for almost 10 per cent of the index and lose out when the dollar falls.

Foreign investors are expected to keep buying as they rush back into what has become one of the world's best-performing markets in 1999. "Foreigners are still under weight in Japan," said Soon Hock Chua, chief strategist at Sanwa Bank in Singapore. "They've been strong buyers of exporters and high-technology shares, but we may see a shift away from those sectors."

Japanese government bonds are likely to fall as a sale of 10-year bonds may fail to lure investors amid concern that the government will have to increase spending to revive the economy.

Investors agreed that the government will have to spend more in the latter half of this year to revive the economy, which the government projects to have shrunk 2.2 per cent for the year ended March.