MW-54 -- 79 Yen per Dollar, BOJ or No BOJ

J@pan Inc Magazine Presents:
Weekly Financial Commentary from Tokyo

Issue No. 54
Tuesday, November 25, 2003

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++ Viewpoint: 79 Yen per Dollar, BOJ or No BOJ

The Bottom Line
o What makes investors nervous about growing trade friction
these days is that everyone knows the US's twin deficits
are a growing problem and that the dollar is over-valued. A
Federal Reserve study suggests that the dollar could drop at
least another 20 percent.

o Thus Money Watch sees no reason to change its view that the
yen will continue to challenge the 100-yen-to-the-dollar
milestone and could eventually attempt to renew its prior high
against the dollar of 79 yen. That could shave roughly 1
percent from Japan's GDP growth. Japanese think tanks are
already projecting a peaking in Japan's economic recovery in
fiscal 2004.

o All things considered, Money Watch suspects that the Nikkei
index will see 9,000 long before 12,000 or 13,000, which is
what the year-end market consensus was.

o Investors should pay very close attention to future Tokyo
Stock Exchange efforts to introduce a float-adjusted Topix
index, because it will have a large negative impact on big-cap
companies with high parent-company ownership, such as NTT
Docomo, as domestic investors re-allocate their equity
portfolios accordingly.

o Meanwhile, we have revisited the "Dogs of the Nikkei" we
listed in Money Watch 37. Even including the recent
consolidation, the group has outperformed the Topix benchmark
by 320 percent -- not bad for a bunch of "dogs."

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++ Viewpoint: 79 Yen per Dollar, BOJ or No BOJ

Preparations for presidential elections next year already have the US
acting protectionist. But the US's major trading partners are not
sitting still for the recent US trade sanctions. Japan, the EU and
China are all threatening to raise tariffs in retaliation.

What makes investors nervous about these trade friction games being is
that everyone knows the US's balance of payments is a problem and that
the US dollar is over-valued. This is why the US plays a "strong-
dollar-policy" charade, while quietly actually allowing the currency
to depreciate. A Federal Reserve study suggests that the dollar could
drop at least another 20 percent.

If the dollar depreciates too quickly, it could precipitate a sell-
off in stock markets (like Black Monday in 1987, which was instigated
by then Treasury secretary James Baker's attempts to push the dollar
lower). US economists have already noted that overseas portfolio
inflows into dollar assets recently have been far short of the $46
billion required to finance the US current account deficit.

With rising US budget deficits and little hope of an offsetting surge
in private savings, this would only reinforce expectations of further
US dollar weakness.

By the same token, the Japanese stock market and the Japanese
government are very sensitive to further sharp appreciations in
the yen. A significantly stronger yen hurts the stock market in two

1)It will work to blunt the recovery in corporate profits, and

2)It will exacerbate the deeply entrenched deflation the Japanese
government has been trying so hard to eradicate.

The Japanese government has so far this year intervened in the
currency markets to support the yen in massive amounts. It has spent a
record 16.2 trillion yen to the end of October in trying to prevent
the dollar from breaching the 100-yen mark; it apparently spent
another 1 trillion yen last Wednesday to keep the yen above 107 to the

But since the real driver behind the yen's appreciation is basically a
US dollar problem, the best the Bank of Japan (BOJ) and the Japanese
government can do is to merely smooth the yen's appreciation against
the dollar. Thus Money Watch sees no reason to change its view that
the yen will continue to challenge the 100-yen-to-the-dollar milestone
and could eventually attempt to renew its prior high against the
dollar of 79 yen. A yet at this level could reduce Japan's GDP growth
by some 1 percent.

The consensus of recent estimates by the domestic think tanks is that
Japan's real GDP growth will slow from 2.6 percent this year to 2
percent in fiscal 2004. Nominal GDP, which better reflects what
corporate sales look like, will be zero this year and minus 0.3
percent in fiscal '04.

Since the correction began in the past month, only the health-care and
telecom-services sectors have managed to record gains. Japan's IT
sector, as expected, has lagged behind its global peers, but the
global IT sector as a whole has also seen profit-taking. However, it
is Japan's banks that have taken the brunt of the selling.

Technically speaking, the Japanese market indexes continue to
deteriorate. The next development in the Topix could be a "dead cross"
between the 13- and 26-week moving averages, which Money Watch expects
to see over the next couple of weeks. Thus while investors are still
ostensibly bullish, Money Watch believes that the Nikkei is more
likely to see 9,000 by the end of the calendar year than the
12,000-13,000 suggested by many not long ago.

Essentially all of Japan's domestic asset managers and an increasing
number of foreign asset managers who are gaining mandates from
domestic pension funds use the Topix as their benchmark for Japanese
equities. The Topix is not free-float adjusted, but the exchange has
been making noises about introducing such a version of the benchmark
index. A free-float-adjusted index tries to identify the number of
shares of a company available for trade; stocks with high
parent-company ownership could be hit hard by such an index.

Needless to say, given a new free-float adjusted benchmark, domestic
investors would have to lower their weightings of some companies.In
NTT Docomo's case, for example, Docomo's stated market cap would drop
from 11.8 trillion yen to only 4.4 trillion yen, and its weight
in a new float-adjusted index would go from around 4 percent presently
to less than 2 percent. This would be a disaster for the company's
stock price.

In late July, Money Watch put together a list called the "Dogs of the
Nikkei" (Money Watch 37, link below) using the same methodology of
the famed "Dogs of the Dow" strategy in the US. While this buy-and-
hold strategy has not yet run for a full year, we nevertheless found
that the Dogs of the Nikkei have made a pretty good accounting for
themselves so far. Even including the recent consolidation, the group
has outperformed the Topix benchmark by 320 percent -- not bad for a
bunch of "dogs."

-- Darrel Whitten

Money Watch 37

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Written by Darrel Whitten

Edited by J@pan Inc staff (


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