MW-60 -- The Stock Market Reads Through Strong-Yen Worries

=====================================================================
J@pan Inc Magazine Presents:
M O N E Y W A T C H
Weekly Financial Commentary from Tokyo
=====================================================================

Issue No. 60
Tuesday, January 20, 2004
Tokyo

======================================================================
Relocate -- And Stay Competitive
In this era of tough business competition, companies are looking for
ways to improve their bottom line. 80% or more of most firms' G&A
expense is the cost of people and premises, and after all, Tokyo IS
the world's most expensive city. One solution may be relocation of
your back office, logistics, help desk, and/or call center facilities
from Tokyo to a regional city. Wakayama stands out for its value
proposition: cheaper offices, lower personnel costs, subsidies and
support from the prefectural government. To find out more about
Wakayama, visit
http://wave.pref.wakayama.lg.jp/062200/ritchie/index.html
======================================================================

++ Viewpoint: The Stock Market Reads Through Strong-Yen Worries

The Bottom Line:

o Going into 2004, there was a very tight market consensus -- to
the point of being a mantra -- that the US dollar had much
further to fall. Whenever the consensus becomes this tight,
it makes Money Watch nervous. As the euro was pushing the
US$1.30 level, it triggered alarm bells in Euroland, and we
have now seen the first visible signs of verbal intervention.
Japanese officials have chimed in with their own verbal
intervention, as well as tens of trillions of yen to back up
their words.

o At the very least, the US dollar is due for a short-term rally
in a secular bear market against the euro. The question is,
will traders then back off the yen as well, or will the focus
shift to trading the yen past the 100-to-the-dollar level? If
the US does cooperate with the European Central Bank in
coordinated intervention, it would be a powerful signal that
the US considers the dollar to have depreciated far enough.
That would certainly also take the pressure off the yen and
perhaps avert a spurt through the 100-yen barrier. As long as
the US continues to practice "benign neglect" of its professed
strong-dollar policy, however, the pressure for the yen to
appreciate will remain.

o Money Watch must admit that when we first called for an
appreciation in the yen to previous highs, we believed that
the dollar-sensitive sectors and stocks would under-perform by
a wider margin. This has not yet happened. Partially because
of the reduced exposure to the dollar, the favorable affect
from a strong euro and heavy intervention by the Bank of Japan
to slow the pace of yen-dollar appreciation, as well as
expectations for a strong recovery in world trade, the yen's
rise so far has not substantially impeded the performance of
major blue-chip exporter stocks. The transportation-equipment,
electronic-appliances and precision-equipment sectors have
outperformed the Topix in the present fiscal year and since
September, albeit by a much smaller margin than
basic-materials stocks.

o The US will see a rush of earnings reports over the next two
weeks, when more than half of the S&P 500 companies report.
Aggregate S&P 500 earnings are generally seen rising 22
percent year on year, and the news from the bellwether tech
majors, like Intel, IBM and GE, is good; they have topped
Street expectations and shown dramatic year-on-year increases,
which, in turn, is stimulating interest in Japanese tech
names. Moreover, trading now seems to be moving to larger-cap
names, with the larger-cap indexes outperforming the small-cap
ones over the last couple of months.

=========================CONFERENCE===================================
Economist Conferences presents:
FOURTH ROUNDTABLE ON HEALTHCARE REFORM IN JAPAN
Taking the pulse of patient-centred reforms
February 10th 2004, Tokyo

Discuss key issues for IT providers.
Assess the business opportunities for IT and internet providers within
the healthcare system.
Gain insights into the financial impact of IT on the running of
hospitals.
For information:
http://www2.economistconferences.com/doc/ap/hthjp04/i.htm
Online registration:
http://www2.economistconferences.com/doc/ap/hthjp04/r.htm
======================================================================

++ Viewpoint: The Stock Market Reads Through Strong-Yen Worries

The pattern of net buying and selling with the onset of the new year
is essentially the same as that seen for most of last year: Buying
among foreign investors has accelerated again, while there has been
equally large amounts of net selling by domestic financial
institutions, corporations and individuals. Indeed, were it not for
the net buying by the brokerage companies on their own accounts,
Japan's stock market would have a negative supply-demand bias instead
of the positive movement in stock prices we have actually seen,
excluding the knee-jerk selling reaction to a rumor that a major
terrorist incident involving Japan's subway system could occur this
week. Corporate pension funds, after having returned public-pension
money that they used to manage on the behalf of the government,
now have smaller numbers of stocks in their portfolios and are
becoming more passive in managing these assets.

Many of the major banks have already reduced their stock holdings
to below their core equity capital, but they are taking it one step
further to reduce the risk to their balance sheet of stock-price
fluctuations. Thus the strong rally last year and the sustained
high level of trading volume has been a welcome development for
the banks, which plan to accelerate their stock sales in fiscal 2004.
With stock holdings of all banks down to 26.88 trillion yen as of the
third quarter of 2003 versus stated equity for all 134 banks of 24.84
trillion yen as of the end of March 2003, the banks are now expected
to become more selective in unwinding their cross-held and strategic
shares. They're planning to carefully review business relationships
and profitability before unloading these holdings. They also intend to
sell holdings to the Bank Stockholding Purchasing Corp., while the
Bank of Japan (BOJ) has extended its program of purchasing bank stocks
to September 2004.

In the insurance sector, there are hints of a change regarding
equities and more selective pruning. Sompo Japan Insurance (8755) is
adopting quality benchmarks for a more systematic weeding of its stock
portfolios. Sompo has adopted the International Quality Ranking (IQR)
model developed by Standard & Poor's to select stocks. The IQR grades
stocks on an eight-point scale -- from A-plus to D -- according to how
appropriate they are as medium- to long-term investments. The
evaluations are based factors such as sales, profits and dividends per
share over the past seven years, adjusting for changes in accounting
methods and merger-and-acquisition activity. Sompo is using this
methodology to selectively weed our poorly rated stocks (ranked as C
in its methodology) and to hold onto or increase its positions in
A-rank stocks.

On the other hand, Daido Life Insurance (8799) intends to increase
its shareholdings. Because of the improvement in its solvency margin
ratio, Daido Life has more leeway to invest in higher-risk stocks.

The Yen Trudges Higher
The yen's upward march to the 100-yen-to-the-dollar milestone
continues. Our Money Watch #54 (see link below) from November was
titled "79 Yen per Dollar; BOJ or No BOJ." Japan's intervention to
brake the yen's rise against the dollar has taken on massive
proportions. Over 20 trillion yen was spent last year, and over 6
trillion yen, or nearly as much as the prior annual record for
intervention, was apparently used in January so far. Japan's
intervention to support the dollar has been increasingly ineffective
since the dollar tumbled below 115 yen last September because of
implications that the yen might ease after a Group of Seven
meeting that called for flexible exchange rates.

Currency traders simply don't believe the US administration's
rhetoric about a "strong dollar" policy. The US administration
says it "favors" a strong dollar policy, but business associates
nevertheless believe they will reap a bonanza from the stimulus
that a weak dollar will give US exports. Shoichi Nakagawa, Japan's
trade minister, stated the obvious when he commented that, "I don't
think the US necessarily wants the dollar to strengthen." Japan is
becoming increasingly restive. Finance minister Sadakazu Tanigaki
said, "In order to get currencies to reflect economic fundamentals, US
deficits need fixing." Despite the diminishing impact of increasingly
large interventions and signals to the market that the government
fully intends to intervene as much as necessary, Japanese exporters
are moving to hedge the risk that the yen will move through the
100-yen milestone this year.

Toyota's move to purchase an option to sell yen at 101 to the dollar
by August 2004 is evidence that Japan's exporters are moving to hedge
their dollar exposure. Compared to when the yen last surged to a
historical high of 79 to the dollar, Japanese companies are now better
prepared. Companies like Pioneer (6773) have shifted the bulk of their
production overseas (around 70 percent of total production) in the
past 10 years. The overseas production ratio for the manufacturing
sector as a whole has risen to just under 40 percent.

Moreover, the yen has been depreciating against the euro, which has
gone a long way in offsetting the profit squeeze from its strength
against the dollar. For companies like Mazda (7261), Sony (6758) and
Japan Victor (6792), the benefits from the depreciation against the
euro have outweighed the damage from the strong dollar. Mitsubishi
Research Institute estimates that a 1-percent rise in the euro against
the yen boosts Japanese corporate profits by 32 billion yen.

The yen's strength against the dollar will hurt manufacturing-sector
profits, especially if the yen stays above 100 yen to the dollar for
an extended period, as roughly half of Japan's exports are denominated
in dollars. Indeed, if the yen moves to around 90 to the dollar and
stays there indefinitely, it will shave 8 percent off aggregate
operating profits in fiscal 2004. Conversely, it would boost
non-manufacturing corporate profits by 6.6 percent. Thus, the total
impact on corporate profits would be a minimal minus 0.3 percent,
according to some estimates.

Market Consensus on Strong Euro Too Tight?
It makes Money Watch nervous when we see a consensus that has become a
mantra for the market -- the dollar is falling and will continue to do
so. Everyone knows that. However, the dollar is not looking very
oversold versus the euro and apparently has reached the pain threshold
for Euroland. Generally speaking, $1.30 per euro appears to be the
level at which the European monetary authorities begin "verbal"
intervention. Should the euro continue upward to $1.40, coordinated
intervention becomes very likely. If the euro does surge to $1.40, the
yen is very likely to breach 100 to the dollar, despite the massive
intervention from the BOJ.

Verbal intervention appears to have already begun. European Central
Bank (ECB) president Jean-Claude Trichet on the 12th said that a
dollar that is too weak is not desirable; France's Jacques Chirac said
that unstable exchange rates are detrimental to France's exports,
which are considered a growth engine of their economy; Belgium finance
minister Didier Reynders said that ECB monetary policy action would be
needed as the euro threatens to break through $1.30. Thus there is
likely to be further verbal intervention by European officials and an
increasing chance of an ECB interest-rate cut within the next few
weeks if the euro continues its upward climb. European efforts to
restrain the euro will prompt caution toward dollar selling, but
unless the US is willing to add teeth to the ECB efforts with
coordinated intervention, the market impact will be lessened.
At the very least, the dollar is due for a short-term rally in
a secular bear market. If the pressure on the euro-dollar rate
is eased, the focus of the currency markets could turn to the
yen-dollar rate, and at least temporarily push the yen through the 100
level. If, however, the US is willing to cooperate with the ECB,
it will be a very strong signal that the US believes the dollar's
depreciation has gone far enough.

Money Watch must admit that when we first called for an appreciation
in the yen to previous highs, we believed that the dollar-sensitive
sectors and stocks would under-perform by a wider margin. This has not
yet happened. Partially because of the reduced exposure to the dollar,
the offsetting favorable affect from a strong euro, and heavy
intervention by the BOJ to slow the pace of yen-dollar appreciation,
as well as expectations for a strong recovery in world trade, the
yen's rise so far has not substantially impeded the performance of
major blue-chip exporter stock prices. The transportation-equipment,
electronic-appliances and precision-equipment sectors have
outperformed the Topix so far in this fiscal year and since September,
albeit by a much smaller margin than basic materials stocks,
particularly over the last several months.

In that regard, worries about the strong yen, while much fretted about
by policy makers and institutional investors, does not appear to be
reflected in the stock market's actions. We still believe, however,
that breaching 100 yen to the dollar will have a much stronger
influence on investors, causing them to take at least short-term
profits in the export majors.

On a comparable sector basis (i.e., comparing the Japan S&P 500
to the US S&P 500), the Japan market is overweight consumer
discretionary, industrials, materials, telecom services and
utilities, but underweight IT, financials, consumer staples, health
care and energy. The US S&P 500 has actually outperformed the Japan
S&P 500 in local currency terms so far in 2004 because of the
performance of the IT sector.

The US will see a rush of earnings reports over the next two weeks,
when more than half of the S&P 500 companies report. Aggregate S&P 500
earnings are generally seen rising 22 percent year on year, but the
news from the bellwether majors -- Intel, IBM, GE and others -- have
topped Street expectations and shown dramatic year-on-year increases,
in turn stimulating interest in Japanese tech names. But while the
weak dollar is giving these global majors' earnings a boost, the
strong yen is a drag on both profits and sales for the Japanese
majors.

Large Caps Play Catch-Up
As the evidence of an economic recovery emerged and investor
confidence returned to Japan, the small cap stocks were quick off
the blocks, with Jasdaq surging 81.7 percent so far in this fiscal
year and the second section of the Tokyo Stock Exchange (TSE 2) rising
46.2 percent. Over the past couple of months, however, there seems to
be a growing preference for larger-cap companies. A similar movement
is apparent in the US, where the Dow Jones industrial average has been
doing some catching up against Nasdaq. Since September, Jasdaq has
risen only 2.2 percent, and TSE 2 a mere 1.2 percent, compared to a
2.4 percent rise for Topix.

The key to a more sustainable large-cap rally, however, is domestic
institutional participation. So far, day trading over the Internet has
provided a significant amount of the boost to overall trading volumes,
but the preference of these individual investors is for small-cap
companies and companies trading at lower unit prices.

-- Darrel Whitten

Link:
Money Watch No. 54
http://www.japaninc.net/newsletters/index.html?list=mw&issue=54

============================ IT PROGRAM ==============================
Temple University Japan presents "The Temple IT Program."
Certification in two key IT areas: Computer Programming and Software
Systems Development.

Study to get a great job in IT, retrain to improve your career in IT,
assess and raise IT staff technical skills. Courses based on
leading-edge course content from iCarnegie (Carnegie Mellon
University).
More info: http://www.tuj.ac.jp/itp/newsad.html
======================================================================
======================================================================
Web localization and ROI for medium-sized enterprises

What is the optimal formula for a successful return on your Web
development investment? Simple: Delight your Japanese users while
budgeting carefully. The key is to work closely with a project team
that employs the right resources and provides a transparent system of
evaluating costs.

Visit http://webproject.jp/jan2004.html to discover the three
critical issues.
=====================================================================
========================== SEMINAR ==================================
Entrepreneur Association of Tokyo - February Seminar

Mike Alfant, President of Building2 and Chair of the High Technology
committee of the American Chamber of Commerce in Japan, will be
presenting, "Keeping Six Inches of Water above Your Head!"

Date: Tuesday, February 3rd http://www.ea-tokyo.com Email:
info@ea-tokyo.com
======================================================================
===========================ADVERTISEMENT==============================
THE ABW MARKET LETTER
"What You Should Read After Irrational Exuberance"
A weekly strategic analysis of Japan's economy and
financial markets with views you use.

Please mail comments to: mailto:info@asianbusinesswatch.com
Archives are available at: http://www.asianbusinesswatch.com
=====================================================================
=====================================================================
Subscribers: 1,382 as of January 20, 2004

STAFF
Written by Darrel Whitten info@asianbusinesswatch.com

Edited by J@pan Inc staff (editors@japaninc.com)

CHECK OUT OUR OTHER JAPAN-SPECIFIC NEWSLETTERS:
http://www.japaninc.com/subscribe_news.html

UNSUBSCRIBE
To unsubscribe from this newsletter, click here:
http://www.japaninc.com/unsubscribe_news.html

ADVERTISING INFORMATION
To advertise in this newsletter, contact:
ads@japaninc.com

GET THE MAGAZINE
Subscribe at:
http://www.japaninc.net/mag/subs.html

FEEDBACK AND PROBLEMS
We welcome your viewpoint:
editors@japaninc.com
(NB Please do not reply to this newsletter -- it's outgoing only,
so we won't get it!)

TECHNICAL PROBLEMS:
webmaster@japaninc.com

(C) Copyright 2004 Japan Inc Communications KK. All Rights Reserved.

business