View from City Road: Japanese markets make feast of meagre pickings

Both the Japanese yen and the Tokyo stock market soared yesterday on the news of the larger-than- expected stimulus package announced by the government. The Nikkei, which has been rising steadily since the beginning of the year, rose 4.3 per cent to a 13-month high on strong buy orders from domestic and foreign investors. The yen has now touched another all- time record against the dollar, and is about a quarter higher than it was just two years ago.

But optimism about the Japanese recovery can change to pessimism overnight, particularly in the Tokyo stock market, which frequently displays a herd mentality that makes lemmings look like rugged individualists.

Yesterday's package was certainly large. On the face of it, the injection is worth some 2.8 per cent of gross national product, and qualifies as one of the largest administered by a Group of Seven industrial country. Even allowing for the Ministry of Finance's crafty habit of merely bringing forward spending that was already planned, this ranks as the sort of fiscal stimulus occidental Keynesians only dream about.

It will certainly add spending power to the economy, and thus help to overcome the recession. But economists say the Japanese economy is still a long way from its former healthy state, and the consensus is that growth is more likely to be 2.5 per cent than the government's 3.3 per cent target growth rate in fiscal 1993.

In this context, the stock market may have rallied too early and too enthusiastically. After all, the primary impulse for the recovery of the stock market from its low of 14,929 last August to its current level above 20,000 has been blatant government intervention rather than any change in the fundamentals. Trillions of yen of public pension funds have been spent to establish a floor of 16,000 in the market. Below that level the Ministry of Finance judges many of the nation's banks to be in serious trouble because of latent losses on their stock portfolios.

True, the rally has now taken on a life of its own, fuelled by the low interest rates in Japan offering poor returns on fixed-interest investments. And foreign money has begun to flow back in on the expectation that the Japanese economy has finally reached the bottom of its recession, creating a virtuous cycle of rising demand for Tokyo paper.

But the surge in stock prices needs to feed on something more substantial than hope if it is to be sustained. Although housing starts are up and car sales have suddenly begun to rise, there are few other immediate signs for optimism. Both retail sales and capital expenditure are still falling, representing two of the largest elements of demand.

Many companies are starting to think that it will be another year before profits start to pick up, particularly those hit by the yen appreciation.

In the interim, the stock market will be trading on price-earnings ratios of 50-60, which is getting dangerously close to those of the mad, bad years of the bubble economy. If the stock market does turn out to have placed a bet too far, the current rally may prove to be another mini- bubble ready for bursting.