MW-75 -- Investment Cycles ・ Compass Anyone?

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J@pan Inc Magazine Presents:
M O N E Y W A T C H
Weekly Financial Commentary from Tokyo
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Issue No. 75
Tuesday, May 11, 2004
Tokyo

CONTENTS
@@ VIEWPOINT: Investment Cycles ・ Compass Anyone?

[*This week, we proudly introduce our new Money Watch contributor,
veteran Tokyo-based investment analyst John Charles-Decourcy.
We also extend our deepest gratitude to longtime contributor Darrel
Whitten, whose excellent research and analyses have characterized
this weekly bulletin. Whitten's commentaries still appear monthly
in our print publication (www.japaninc.com), and also at his own Web
site (http://www.asianbusinesswatch.com). Thank you, Darrel.]

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@@ VIEWPOINT: Investment Cycles ・ Compass Anyone?

I imagine that the conundrum of working out where you are in an economic
cycle (and thus the investment cycle) is very much like navigating from
town to town three- or four-hundred years ago, before there were any
signposts and railway lines to follow. Navigators had to use the
terrain, the sky and historical references to ascertain where they were,
but ultimately the navigators themselves only knew of success upon
arrival.

So it is with investment: We know where we are, but we must use the
signals and cues from around us to divine the future direction.

With that as the caveat, for this first article I thought we should
look at the Japanese equity market. From my experience, I am convinced
that there is no such thing as a rational market, nor do I believe the
market is efficient. But I am convinced that common patterns do occur
over and over again in many walks of life, not least the markets.
And a clear pattern appears to be developing in the Japanese stock
market.

The fall from the 40,000 yen high on the Nikkei and the years of
stagnation have been well documented for all, but the past four years
have provided many signals of a new direction for the astute observer.
The sell-off to a low of 7,603 yen (19 percent of the high of 1990)
started from a peak of just over 20,000 yen at the beginning of 2000
and reached the low in March/April 2003. Since then there has been a
rapid rise in share prices on large volumes of shares being traded.
These weekly and monthly movements have formed themselves into what
technical analysts call "an inverse head and shoulders."

The inverse head and shoulders broke its neckline at 11,500 yen a few
months ago, and this -- coupled with the increased volume -- is a
very powerful reversal pattern; the technical analysts tell me that
this projects to 16,000 yen on the Nikkei, but as with all markets,
there will be a few bumps in the road, and it may take some time.
The current pullback is very consistent with that view and the chart
is developing symmetry around the low -- another good sign.

Yes, I can hear the cries already: "But the banks still have massive
problems;" or "Credit is still contracting;" or "What about the life
insurers?"

Agreed, these are still significant problems. But in the 90s, the US
equity market signaled the successful resolution of the savings and
loan issues well before the problems had been clearly resolved.

I believe the market is indicating a key turn here: There are
additional signals suggesting that Japan may be entering into a
multi-year growth phase that has the potential to put China's
recent growth to shame in some respects.

We will analyze the indicators from the economic landscape as we
travel the road in Japan and comment on the twists and turns in the
path -- because I am sure of one thing: Wherever Japan's economic
destination lies, it will not be down a straight road.

-- John Charles-Decourcy

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STAFF
Written by John Charles-Decourcy (jcd@japaninc.com)

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

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