Japanese Market Outlook: August 1998
Market Outlook, Aug 3-7
Obuchi survives 1st week
Despite the market's dissatisfaction with the LDP's selection of Mr Obuchi as
the next PM, and despite his difficulty in persuading Mr Miyazawa to be his
finance minister, his first week in office has been accompanied by a gain of
0.3% in TOPIX. That first week also brought further underperformance by the
banks, a steep fall in the yen and a surge in the bond market. Japan has been
ridiculed for changing its prime minister so often in the 1990s (Mr Obuchi is
the 7th PM since Kaifu took office in Aug 89), but in fact it has been that way
since the Meiji Restoration: in the 104 years between Dec 1885 and Aug 1989,
Japan changed its PM 60 times. But at least Mr Obuchi knows that his
administration may not last beyond the Sep 99 LDP elections, so he has to get to
work quickly. Now that he is in office, some investors have come to believe that
he was probably the best choice after all, since the key to the PM's performance
is his ability to get bills through the Diet rather than popularity with the
electorate. Since Mr Obuchi has few enemies, and closer ties to the Komei and
other opposition parties than many others in the LDP, he should be more able
than others to get the financial bills and tax cuts through the Diet.
No big banks insolvent?
The local press is describing the Obuchi/Miyazawa stance on the bad-debt problem
as an effort to seek a "soft landing", as opposed to the "hard landing" favored
by Mr Kajiyama. Indeed, the market has favored the radical surgery proposed by
Mr Kajiyama, since it implies that the system would be cleaned up more quickly,
although it would also be accompanied by more severe short-term dislocations and
pain. Since Mr Miyazawa was the chief architect of the Total Plan proposal, and
particularly the concept of bridge banks, it is only natural that the new
administration try to push the six financial bills drawn up by the Hashimoto
administration through the current Diet session. However, the market is already
suspecting that none of the big 19 banks will be affected by the bridge bank
scheme. The main reason for this doubt is that the government proclaimed that
none of the big banks was insolvent last spring, when public money was used to
purchase prefered shares or subordinated bonds in each of them. Although the FSA
is currently auditing the big 19 banks, many investors believe that none will be
found insolvent when final results are announced in mid-September. Mr Miyazawa
has expressed his personal opinion that he doesn't think any of them are
insolvent. There is also concern that if one were found to be insolvent and
thus have its assets transferred to a bridge bank, that depositors would
withdraw their funds so quickly that the budgeted public funds would soon run
dry. There is also doubt whether a bridge bank could find takers for the
performing assets of a big even within the five-year time period, since the
margins on loans to the banks' big customers are likely to be very thin and the
creditworthiness of the smaller customers questionable. This week's Nikkei
Business also suggests that a large portion of Category 1 loans should be
reclassified as Category 2 loans, particularly loans to countries whose credit
ratings have been reduced, to government institutions such as the Japan National
Oil Corp and to keiretsu nonbanks. This is probably why the New York Times last
week estimated that total bad debts in Japan approach $1 trillion (ie, Y140 tr
rather than the recent official estimate of Y87 tr). In any case, it seems
inevitable that the stock market is going to take a hit no matter what the
results of the FSA audits: if it finds that no big banks are insolvent,
investors will not believe that the audits were strict enough; if one or more
banks are found insolvent, the market will probably punish those banks and
companies in its group.
Technical picture
Last week's modest gains keep the technical condition positive. Athough
Monday's 417-pt decline sent TOPIX below several moving averages, the subsequent
recovery allowed it to close last week slightly above the 200-day, 13-wk and 26wk moving averages. The 200-day m.a. is still declining around 3-4 points per
week, so the technical definition of an uptrend will not be fulfilled until it
starts to rise. Nevertheless, since its pace of decline is moderating, the 200day m.a. itself will eventually start rising if TOPIX can stay above it. The
outstanding short interest continues to build, and is up 41% from the Apr 3rd
low to Y562.9 bn. The low volumes show that there is not much conviction in the
overall market, but it is noteworthy that TOPIX is managing to forge ahead
despite being weighed down by the second biggest sector, the banks. In April,
TOPIX rose 2.57% despite a 5.0% decline in the TSE Bank Index. Meanwhile, there
is sign of growing conviction about those few stocks which have been able to
reach new highs and keep on going, like Kao, Bridgestone, Tokyo Seimitsu,
Olympus, Canon Electronics and NIDEC.
Winners and losers
The strongest subsectors last week were General Contractors +6.7% vs TOPIX, Kao
+5.0%, Environmental Equipment +3.9%, Real Estate +3.6%, Rohm +2.3%, Convenience
Stores +3.0%, SPE +2.8%, Airlines +2.8%, Hitachi/Toshiba +2.7%, Turnaround
Components +2.6% and Tires +2.5%; the weakest subsectors were Consumer
Electricals -5.4% vs TOPIX, IBJ -4.8%, Sekisui Chem -4.6%, EP Construction 4.6%, DDI -4.5%, Industrial Tools -4.2%, Spinning -4.1%, Electric Steels -3.5%,
Big Steels -3.3%, Downstream Chemicals -2.7% and IC Chemicals -2.5%. New tenyear relative highs included Kao, Tires, Rohm and JR East; new lows included
TSE Bank Index, IBJ and Trust Banks.
Share buybacks
Following the rush of companies announcing changes to the Articles of
Incorporation to allow share buybacks, it is encouraging to see that some
companies have started buying back shares already. Over the past seven trading
days, over 40 companies have announced the results of actual buybacks, ranging
from the 6,000 shares bought back by Seed (7743) to the 4.0 mn shs bought back
by Kirin for Y5.07 bn. Companies which have bought back over 1 mn shares in the
past month include Sumitomo Osaka Cement 3.65 mn shs, Nichimen 1.59 mn, INAX
1.24 mn and Nisshin Steel 1.01 mn. In some cases, prices are so low that it
doesn't cost the company much: Nisshin paid only Y201 mn for its shares.
Furthermore, Mr Toriumi, an independent businessman is gaining operating control
of Sari (9958) for only a little over $1 mn, and news of the TOB helped the
shares triple last week to Y280.
M&A on the rise
Last week also brought the decision by Daiwa and Sumitomo Bank to set up three
new wholesale joint ventures, and to separate Daiwa's institutional business
from its retail business. Bridgestone and BS Metalpha both rose on their plans
to merge, while the Asatsu, Daiichi Kikaku and WPP grouping also led to strong
share-price gains. Meanwhile, GE Capital's plan to acquire an 80% stake in
Ryoshin Lease, a Mitsubishi divestiture, sent ORIX's shares down 6% last week.
Europe-related stocks
With the yen falling to a new low vs DM last week, and with many companies
seeing strong demand in Europe, the market has been buying European
beneficiaries such as Okuma, Komori, Aiwa, Alps, Fujitsu General, Ricoh, Star
Micronics, Murata, Fuji Machine, Asahi Optical and Koyo Seiko. Yamaha Motor
surged on Friday. Its production of motorcycles rose 8.6% in June, a month when
auto production overall was down 10%.Motorcycle sales to Europe were up 35% in
Jan-May, and its marine products division is enjoying strong demand in the US
and Europe.
SOX up, Sony down
Sony fell 7.2% last week as the company announced that Q1 OP fell 5%. Although
the results were better than many analysts had expected, investors worried
because the company 1) revised its yen/dollar estimates for FY98 up from Y125 to
Y135 without revising up its full year net estimates and 2) it revised down
estimated shipments of the Play Station from 18.5 mn units to 18.0 mn units.
Given that management has been talking down expectations since February but that
its long-term growth potential is improving, according to Fujino-san, JF's HOLD
rating seems appropriate. By contrast, MCI surprised the market with its upward
revision for H1, much as HOYA did the week before. Both are JF BUYs.
Meanwhile, the SOX index has edged up despite the overall sell-off on Wall
Street, following upbeat comments by Applied Materials and Micron Technology.
AMD rose 14% on Thurs-Friday as the company thinks it can move into the black by
the end of CY98, and data-storage stocks advanced led by Komag. On the TSE, PC
stocks gained on reports that Win98 initial sales exceeded those of Win95, and
NEC rose on Friday despite announcing plans to invest another Y30 bn in Packard
Bell. Although the Nikkei compares this investment to Mitsubishi Estate's
bloodbath on Rockefeller Center, Steve Myers is confident that NEC can improve
PB's earnings and capital structure sufficiently to list the unit in the US in a
few years. NEC has been raising margins on its own PCs despite double-digit
declines in unit sales, so it should be able to do the same on the 7 mn PCs
which PB sells annually.
Market Outlook, Aug 10-14
Should be quiet, but . . .
With many companies closed for this entire week, there is unlikely to be much
corporate news to move share prices (although distressed companies have been
known to use the quiet period to declare bankruptcy). Meanwhile, government
stats and reports will continue to flow. Worthy of note will be the EPA's
monthy economic report due out on Tuesday, since EPA Chief Sakaiya has promised
to start producing reports that tell it "like it is" rather than "like it is
supposed to be." Thus it may be worth reading for a change.
Mr Sakaiya's (private) proposals
Now that Mr Sakaiya is in the cabinet, will he promote some of the ideas he has
recommended in his writings? Such as 1) have the government issue Y100 trillion
in Economic Reconstruction Bonds (Y60-70 trillion for the financial system and
disposal of hidden losses plus Y30 trillion for tax cuts over three years), 2)
privatize the Japan Highway Public Corp, the HUD, Narita Airport and the post
office, 3) keep budget spending growth over the next ten years just under the
CPI growth and 4) deregulate education, medicine and real estate.
Greenspan bearish on Japan
Sunday's Nikkei reports that the Aug 10th issue of Volks, a German weekly,
carries Mr Greenspan's pessimistic view of Japan, as conveyed to Gerhard
Schroder during his visit to the US, as follows: Japan has such huge bad debts
that it is bust; it has missed the opportunity to solve these problems; they are
trying to prevent banks from going bankrupt, so there is no visible effort to
dispose of bad debts; thus Japan's economy will remain in a downtrend.
The nightmare continues
Of course Mr Greenspan's observations are not news; but they are newsworthy
because of Mr Greenspan's position and his connections with senior Japanese
officials, and because he was in Japan just after the July 12th election.
Meanwhile, bank shares have been performing as badly as one would expect based
on the arguments in Walter Altherr's April report "Japanese banking: the
nightmare continues." Since Apr 1st, the TSE Bank Index has underperformed
TOPIX by 17% and stands at its lowest level relative to TOPIX since early 1984.
Last week the better banks (Sanwa -13.2%, BOTM -12.0%) were among the weakest
stocks in the market, suggesting that the selling is coming from funds which
have held the best quality banks, rather than from new shorting. As Mr
Greenspan observes, the Obuchi government hopes to achieve a soft landing in
which no big banks go bust while Mr Miyazawa does not believe that any big banks
will be needing the services of bridge banks. Some big companies are taking a
different view: MHI is accelerating its unwinding of cross holdings because it
thinks the market will go lower, while KHI will repay all of its Y3.5 bn in
loans from LTCB by the end of September.
Real estates plummet
The TSE Real Estate index underperformed by 5.0% last week, leaving it only 8%
above its double-bottom of Jul 92 and Nov 94. Sumitomo Realty slumped 12.8% on
its biggest volume in three years, and at Y524 is only 8% above its post-bubble
low of Jun 95. Since Sumitomo has been the most aggressive in expanding over
the past couple of years, it has the most to lose if the economy does not
recover. Although commercial land prices have fallen over 70% from their peaks,
US vulture funds and merchant banks are paying only 5-10% of book value on their
packaged deals, suggesting that prices could go lower. In addition, if the
Total Plan for Financial Reconstruction is passed by the Diet and is implemented
successfully, there will be a large increase in new supply. Real-estate
bankrutcies in 1H '98 rose 33% YoY to 346 cases, the highest level since 1H '95.
All in all, the scenario described in Steve Weiler's Q2 report ("Land values
still too high") is coming true.
Big electricals under pressure
After nine consecutive days of decline, during which time it dropped 14.6% below
its Jul 21st high, Sony's share price posted a modest gain last Friday. Since
it bounced off its 26-week m.a. (at Y11,530), the uptrend is still intact.
However, given than the company is dampening expectations for FY98 profits and
that the electronics sector tends to hit a seasonal peak just before O-bon, more
time is probably needed before a strong uptrend can resume. MEI slumped on big
volume last week after Fujino-san suggested that the weak economy is hurting its
non-consumer-electronics businesses, and it closed last week right at its 26week m.a.. NEC dropped to Y1,200 for the first time since Oct 96 after deciding
to cut IC capex this year, but the SPE stocks managed to rise in last week's
market. TDK's chart is rolling over and the stock fell 3.1% last week even
though US investors suddenly turned bullish on disc-drive stocks late last week.
Meanwhile, the market remains excited about mid-sized high-tech stocks such as
Aiwa, Olympus, NIDEC, Mitsumi, Hoshiden, Taiyo Yuden and Enplas. Mabuchi would
benefit if the Chinese yuan were devalued, although the company has been
reluctant to quantify any such potential gains.
Qualcomm threatens delay in W-CDMA
Qualcomm is so far refusing to grant the European/Japanese promoters of W-CDMA
the rights to use CDMA technology, which means that there could be delays in the
launch of common standard cellphones in the two regions. NTT Dokomo has been
planning to start service in FY2000, but this will not be possible without
access to the basic patents on CDMA. Japanese industry observers believe that
Qualcomm will grant the patents after negotiating higher royalties for itself,
but there is no guarantee. This news could knock down MCI's share price, which
closed last week 50% above its Jun 24th low.
Tax cuts
My Miyazawa wasted no time in reaching agreement with the LDP Tax Commission to
have a fixed-rate income tax cut in 1999 and to cut the corporate tax rate from
46% to 40%. Although Mr Miyazawa said that next year would bring ta cuts for
all income brackets, the tabloids are complaining that the fixed-rate system
could actually mean higher tax payments for some households making less than Y9
mn per year. Meanwile, there are reports that the LDP will also abolish the
securities transaction tax (the 0.1% tax charged when equities are sold), which
would be big positive for traders and a modest positive for investors.
Technical picture
Several major markets bottomed on June 16th (the day the US intervened in the
forex market), rallied for exactly a month to peak on July 16-17th, and have
since been in decline. TOPIX rose 10.7% to 1,280.73 on July 16th, and has since
fallen 4.3%; the S&P500 rose 10.2% to 1,186.75 on July 17th, and has since
fallen 8.2%. In the same but reverse pattern, the JGB futures price fell from
134.16 on June 16th to a low of Y131.50 on July 17th, and has since recovered to
134.06. TOPIX peaked on the day that Mr Kajiyama announced he would run for
president of the LDP, as investors favored his proposals for drastic surgery on
the bad-debt problem. As a result of the recent weakness, TOPIX closed last
week below its 26-week and 200-day m.a. lines, signaling that the potential new
uptrend may have come to an end before it could take root. The strength in
JGBs, coming despite the threat of a donwgrade by Moody's and despite the 180degree turn in fiscal policy as Mr Obuchi took over from Mr Hashimoto,
underscores the deflationary pressures at work in Japan. As local economists
have noted, over Y1,000 trillion in wealth has been destroyed in the stock and
real-estate markets since 1990--too much to be offset by the combined Y81
trillion in economic packages since 1992. With the supply-demad gap at Y33
trillion (6.5% of GDP), and with exports slowing, industry still has a lot of
excess capacity and labor to get rid of.
_________________________
Market Outlook, Aug 24-28
Goodbye to LTCB
Having earlier decided that the top 19 banks are too big to fail and that the
bridge-bank format isn't really suitable for the giant banks, the Obuchi
government worked out a new format for handling the bad-debt problems at really
big banks. The BOJ (which fears the consequences if any really big bank goes
bust) will provide noncollateralized "tokuyu" loans for LTCB's working capital,
the DIC will provide up to Y1 tr in new public capital and the government will
guarantee that the CCPC does not suffer any losses on bad assets that it takes
over from LTCB. To cleanse itself for the merger with Sumitomo Trust Bank
(STB), LTCB will write off Y750 bn in bad loans, forgive loans of Y520 bn to its
three nonbanks, close overseas operations, have the president and some other
directors resign and forfeit their retirement pay, ask 24 retired directors to
return their Y3 bn in retirement pay, fire 700 staff in FY98 and sell the new
Y50 bn head office. Of Nippon Leasing's Y1.89 tr in total debt, LTCB will
abandon all of its Y255.6 bn in loans to the company and ask other financial
institutions to forgive Y230 bn; curiously, even though STB is the second
biggest lender (Y150.8 bn), it will not be asked to join the debt forgiveness
since it is already taking on such a big burden. One wonders why BOTM (Y84.8
bn), Tokai Bank (Y59.1 bn) and Sumitomo Bank (Y50.2 bn) are agreeing to forgive
part of Nippon Leasing's debt, especially when several regional banks and ag coops will not be asked to. Perhaps their generosity will be rewarded: last week
Kyocera rose 4.9% as it promised to help out Mita Industries for social and
humanitarian reasons. Meanwhile, LTCB surged 85% last week even though the
public-support measures so far indicate nothing about the price that
shareholders will receive when LTCB merges with STB. Since STB shares fell 2.9%
last week (whereas the average bank rose 3.8%), the market seems to agree with
Walter Altherr's assesment that the merger is not such a good deal for STB, even
if it only takes on LTCB's "good" assets.
The itinerary from here
The Diet will begin debate on the six Total Plan financial bills on Aug 25th,
and although the odds are that the LDP will be able to find enough votes to pass
the bills after making a few amendments, the whole bridge-bank scheme looks
anti-climatic now that we know that failures of really big banks will be
prevented through the use of public money just before they become insolvent. Mr
Miyazawa will travel to San Francisco to meet Mr Rubin on Sep 4-5, when he may
give the U.S. a rough idea about the Financial Supervisory Agency's audits. (A
cynical journalist in the latest Ekonomisto says that a top-class hedge fund
will hear about the report within a few hours, and will undoubtedly decide to
increase its selling of Japan.) The FSA audit results for the 14 biggest banks
should be out in mid-September, according to a young LDP dietman quoted in this
week's Toyo Keizai, in time for Mr Obuchi's visit to President Clinton on Sep
21st. The audits for the other banks should be completed by November.
Who's next?
Unfortunately, the measures being used to sort out LTCB will not be sufficient
to resolve Japan's bad bank problem, so the market is likely to shift its
attention to the next target. Of the several candidates, this week's Ekonomisto
takes 16 pages to make the case for Fuji Bank. The major points are: 1) Fuji
Bank never seems to lose money on derivatives, which is suspicious, 2) it has
the highest bad-debt ratio among the city banks yet its reserve ratio of only
53.5% ranks its 15th of the 19 big banks, 3) it had unrealized losses on its
stock portfolio of Y230.6 bn in Mar 98, 4) its still has several hundred billion
yen of bad debts in the Kansai area after it challenged Sumitomo's supremacy in
the region in the late stages of the bubble, 5) it forgave Y640 bn in
Tobishima's bad debts rather than put the company into bankruptcy to prevent the
administrators from coming in and finding accounting irregularities, 6) the
Tobuei Sangyo group, subsidiaries of Tobishima, has debts of over Y800 bn and is
deeply insolvent, 7) Taisei Construction, over 15% owned by the Fuyo/Okura
groups, still has a lot of high-risk assets to write off, especially at
subsidiaries such as Seiwa Lease and Seiwa Property, and 8) it is losing the
capacity to look after members of the group, since Showa Line is being
transfered to the Mitsubishi group and since Okura & Co. had to ask its steel
suppliers to accept delayed payment on checks because 'there was not enough time
to consult its main bank."
Overbanking to continue
One of investors' main criticisms of the LTCB scheme is that is does nothing to
reduce capacity, and indeed the government is still convinced that it has to do
something to protect all those healthy borrowers out there. It can't seem to
grasp the fact that there is way too much debt in Japan. On Aug 28th, MITI is
expected to decide on a policy for government financial institutions to provide
Y40 tr for loans and guarantees to ease the credit crunch. Some managers in the
government banks wonder why they are being asked to make loans to such lousy
credit risks, so the result is likely to be the shifting of a lot of potential
bad debts from the private banks to the public ones.
Tax help for constructions
In addition to the additional public works being planned for the next
supplementary budget, the government is also considering special tax measures to
help the general contractors speed up the disposal of their bad debt. These
measured, outlined on p22 of the Aug 22nd Toyo Keizai, include 1) ease the
standards for the special accounts for write-offs of bad assets, so that a
greater amount can be reserved for each loan made, 2) allow greater losses to be
taken on th revaluation of land assets and 3) double the period over which
losses can be written off against taxes from five years to ten years. The
problem assets held by the to 53 companies rose from Y2.6 tr in Mar 84 to Y7.8
tr in Mar 91 and peaked at Y11.0 tr in Mar 94; but have barely fallen and
remained at a staggering Y10.1 tr in Mar 98.
Hitachi hits 4-year low
Hitachi fell 7% last week to Y757, its lowest level since Nov 93, following
several articles about its restructuring plans. In an interview in last week's
Toyo Keizai, President Kanai indicated that details of the plan would be decided
by next March, but he also said that there was no intention to follow the US
style "where businesses are cut off when they are no longer needed." By
affirming that Hitachi would restructure in the "Hitachi style", he may have
invited impatient investors to sell their shares in favor of a company where
decisions and actions are taken in a speedier manner. Mr Kanai reiterated that
there was no point in setting up a holding company under current tax laws, but
Canon is planning another way around that problem. If the taxes and other
business regulations are not eased, Canon will move its global headquarters to
the US by 2005. In FY97, Japan took only 30% of Canon's sales but snared 76% of
its consolidated taxes.
_______________
Market Outlook, Aug 31-Sep 4
Crunch Time
At a time when the environment for equities has turned negative everywhere, the
gearing that Japanese banks and corporates have into the stock market is making
the situation even worse that it would otherwise be. The rest of the world is
starting to experience what Japan has already been going through--the phenomenon
in which declining bond yields do nothing to support share prices, because
burgeoning deflationary forces reduce the stream of future cash flows faster
than the underlying equities become cheap relative to the lower interest rates.
To the extent that economies in Europe and the Americas will slow following the
declines in their respective stock markets, it is bad for Japan, which has been
relying on external demand to compensate for the lack of demand at home. Not
that overseas markets have provided much support: exporters like MEI, Pioneer
and evenSony are suffering profit declines despite the weak yen. Meanwhile the
adverse gearing of declining share prices is exacerbating the situation. With
the new 12-year low in the stock market, only three of the 19 big banks still
have unrealized gains on their stock portfolios, while Fuji Bank's unrealized
losses now approach Y600 bn. Thus most banks will no longer be able to rely on
stock-market profits as a source of funds to write off bad debt; their writeoffs will be contrained by the amount of net operating profit they can earn.
The game called "ekidashi" (realizing profits by crossing shares) seems to be
over, as there were no big crosses on any of the three major markets last
Friday. Meanwhile, corporations which still mark their portfolios to market
have to revise down further because of stock losses. One reason that Shiseido's
stock is down 40% YoY is that it is likely to suffer valuation losses of over
Y50 bn in the Sep interim, compared to its RP target of Y17.5 bn.
Worse than Russia
The New York Times observed that the Y21.6 trillion decline in Tokyo's market
cap last week was greater than the annual GDP of Russia, implying that the
economic and financial problems in Japan are much more serious for world markets
than Russia's repudiation of debt and total failure as a capitalist state.
Unfortunately, a resolution to Japan's financial-system problems seems likely to
be delayed now that the three major opposition parties have agreed on a counterproposal to the LDP's Total Plan (and the economic situation is not likely to
improve until the financial problems are squared away). Mr Obuchi has proposed
a joint LDP-opposition party committee to iron out the differences, but the
opposition is in no hurry to comply. Although there are many similarities in
the two sides' proposals, there is a wide gap on a couple of key issues: the
opposition parties believe that insolvent banks should be liquidated (except
where doing so would lead to a chain reaction of bankruptcies) nd they want the
decision about insolvency to be made by an independent Financial Revitalization
Committee rather than by the FSA (which is perceived as being too close to MOF).
The LDP cannot even count on support from all of its members, as Mr Kamei has
bolted from the Mitsuzuka faction with 20 other Diet members, and has expressed
a preference for some of the measures in the opposition proposals.
The weak case for LTCB
The LDP is finding it impossible to win the PR war for its proposed resolution
of LTCB. Its main argument is that the liquidation of LTCB would cause untold
damage to the domestic economy, to the financial system and to the
creditworthiness of Japanese banks on global markets. However, it has not been
able to convince people that the disappearance of LTCB would be any worse than
the loss of Hokkaido Takushoku Bank. Many critics (including opposition
politicians) believe that the main reason LTCB is being rescued is to protect ag
co-ops, which have Y354.3 bn lent to Japan Leasing. In stunning Diet testimony,
Mr Miyazawa admitted that the prime motive for injecting public money into the
jusen clean-up was to bail out ag co-ops--something that was broadly suspected
but firmly denied by the government at the time. The weekly magazines and
tabloids are having a field day with the LDP proposal to inject Y500 bn into
LTCB, which would in turn forgive Y520 bn in loans to its three major nonbank
subsidiaries. Meanwhile, it is suspected that LTCB's Y417.3 bn in loans to three
paper companies (Shimbashi Sogo Kaihatsu, Yurakucho Sogo Kaihatsu, Hibiya Sogo
Kaihatsu) are backed by nothing more than dud loans that have been shunted to
them. More revelations are possible on Monday, when LTCB's president will
testify before the Diet.
Back to 1985
Having dropped decisively below the long-term support provided by a triple
bottom, TOPIX looks likely to sink rapidly to its next line of support at around
1,000 (13,000 on Nikkei), where it traded in the latter half of 1985. That line
of support is only 8% below Friday's close, so another bad week like last week
and we'll be there. A TOPIX level of 1,000 should hold for some time, since the
1985 base at that level was formed over a nine-month period. In addition, many
of the major bank stocks have already fallen back to 1984 levels, so about 13%
of market cap has already fully returned to the 1985 base. The move out of the
1985 base began in Dec 85, just three months after the Plaza Accord, and it did
not stop until the market had risen 2.8X to its all-time high in Dec 89. After
some consolidation at TOPIX 1,000, it could drop further to around 800 (10,000
on Nikkei), where another base formed in the first eight months of 1984. That
was the year in which bank stocks came alive, rising 127.2%, reflecting the
start of tokkin funds and the launch of equity issues by banks. Sumitomo Bank
surged from Y500 to Y1,910. Until that time bank stocks were dead, and the
perception was that all the city banks traded at Y500 no matter what.
Ironically, just as it was the start of equity financing (and the resulting
excesses in lending) that brought bank shares to life, it has been the need for
even more equity capital (in the form of mandatory preferred CBs, subordinated
loans, etc) that has driven them back below the Y500 floor that was in place
until 1984.
Stocks for the long haul?
We wonder about all the data produced by Ibbotson and others in the US, showing
how common stocks beat every other investment handily if held for the long term.
That may be true for the US, but it doesn't seem to apply to other countries. We
note that the Nikkei is 37% below its 120-month m.a. while a couple of wellknown long-term investors are costing their own shareholders dearly. Nisshinbo
is down to Y430, some 78% below its Jan 90 peak and its lowest level since 1983;
Kubota is at Y249, some 82% below its Apr 89 peak and its lowest level since
1972. Many oils are trading at 20-year lows, while General Sekiyu (despite
being half owned by Esso) closed last week at a new all-time low.
Real estates, rails retreat
Tobu, Tokyu, Odakyu and Keio fell last week to their lowest prices since 1985
while the TSE Real Estate Index underperformed a very weak market by 3.2%, to
within 8% of its Jul 92 relative low. The overall market is not likely to
improve until real-estate taxes and regulations are improved, but those items
are no longer near the top of the government's agenda. Sumitomo Realty, the
most geared of the majors and the one that has bet the most on a recovery, has
fallen to a 14-year low, compared to a 3-year low at Mitsubishi and a 6-year low
at Mitsui.