MW-53 -- The Bloom is off the Boom

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

Issue No. 53
Tuesday, November 18, 2003

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++ Viewpoint: The Bloom is off the Boom
The Bottom Line:
Top-Down: Latest Japan GDP numbers indicate slowing recovery and much
less growth than the US.
o Investors are still not sure whether this recovery is yet
another transitory blip or a real recovery. Japan's third
quarter GDP, while better than the 1.5 percent foreseen by
some consensus surveys, was noticeably slower than the
surprising second quarter.

o In other words, Japan is comparing less favorably vis-・vis
other markets and economies these days. In addition, market
focus has returned to the strong yen, despite continued
intervention by the Bank of Japan. Further appreciation in the
yen will be cause for a negative reaction in the stock market.

Bottom-Up: The market technicals have soured.
o The rally in the financials has ended for now, with the sector
bringing up the rear in terms of performance since the end of
September. An extended correction in the financials could well
take the entire Japanese market with it.

o While foreign buying continues, domestic individual investors
were caught off guard by the sell-off in the banks and
crashing stock prices of day trader favorites like Softbank.

o The telecom services sector, which has lagged behind the
market recovery to date, could ostensibly replace the
financials as the market leaders, but Money Watch believes
that the earnings fundamentals of the telecom-service
companies are just not up to it at this point. Be prepared for
some market downside and perhaps even nasty sell-offs in some
of the recently high-flying financial stocks.

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++ Viewpoint: The Bloom is off the Boom

Japan's third quarter GDP came in at an annualized 2.2 percent. While
that's better than the 1.5 percent foreseen by some consensus surveys,
it was still noticeably slower than the surprising 3.5 percent of the
previous quarter. Growth is still driven by capital expenditures and
exports, with capital expenditures slowing from an annualized 4.7
percent in the second quarter to a more mundane 2.8 percent. Moreover,
consumer spending, which accounts for over half of the GDP, was flat
with the previous quarter.

In addition, while Japan's November elections were not a surprise,
there was a slap on the wrist from voters in the form of a better-
than-expected showing by the merged and re-energized Democratic
Party, which had the Liberal Democratic Party circling the wagons and
merging with a smaller member of its ruling coalition.

While Money Watch views this as a positive long-term development, the
mixed signals from the latest elections were enough for stock market
participants to pause and reflect. The relatively strong Democratic
Party showing in the polls has investors considering the possibility
of a policy shift toward a more "hard landing" scenario, as the
Democratic policy platform is less friendly toward banks and their
deadbeat borrowers.

In reality, the bloom is already off the boom in Japan's surprising
stock market rally to date, and for reasons including but not limited
to the recent elections. First of all, there is evidence that the
early, more aggressive hands among foreign investors are taking
profits, and this is nowhere more apparent than in the sell-off of the
banks. In our Money Watch #50 newsletter (see link below), we warned
that the first sign of a correction in the Tokyo market would come
from the financials.

The Topix banking sector has sold off some 26 percent from a high of
255.68 and is now showing a bearish head-and-shoulders pattern after
having corrected down to its 26-week moving average at around 190.
Money Watch believes it is unlikely to breach 240 on anytime soon, as
anyone who wanted to own the financials already owns them and in large

Individual investors have been handed their first major setback in the
rally. Softbank, the darling of Japan earlier this year, has
collapsed, crashing from 7,370 to 4,310 yen recently, a fall of 42
percent. It announced a 77.3-billion-yen deficit for the interim to
September, the largest deficit the company has ever recorded. Given
the losses, individual investors have been dumping stocks to cover
margin calls.

Another sign that the bloom is off: The Topix Core 30 index of large
cap, internationally well-known blue chips has lost 13 percent from
September highs and is also showing a bearish head-and-shoulders chart

Now that the Japanese market has lost the leadership of the banks, the
question is, what sector can take their place? Over the past couple of
weeks, there has been evidence of renewed interest in the long-dormant
telecommunications sector, instigated by a positive surprise by NTT,
with its latest quarterly results. NTT, the bellwether of the group
and the Japanese stock market as a whole, rose sharply during the
1999-2000 bubble, but has been bumping along the bottom since late
2001 and recently sold off again some 20 percent from October highs.
NTT Docomo exploded fourfold during the bubble, but did not confirm
downside support until early 2003. It is now in the process of
reconfirming downside support at 220,000 yen after plunging 31 percent
from August highs.

Money Watch wonders if the sector is yet ready for a sustainable
rally. Pretax profit for NTT for the full year to March 2004 is now
expected to rise a measly 0.5 percent from the previous year to 1.41
trillion yen. NTT Docomo reported a profit decline for the first half
of fiscal 2003, the first decline since its listing in October 1998.
There are concerns about the limits to Docomo's business model.
Revenue-related expenses such as incentives and paying for handsets
amounted to 913 billion yen, an increase of 23 percent from the same
term the previous year. The expenses equaled 36 percent of sales, a
jump of 5 percentage points. The increase shows that even if costs are
incurred to sign up and keep subscribers, their ability to expand
sales is lessening.

Remember the Industrial Revitalization Corporation of Japan? When
it was just getting started in early May 2003, there was interest in
companies that could be chosen by the corporation for corporate
revitalization. But Money Watch was skeptical even before the
corporation was established (see Money Watch No. 43 link below). This
skepticism has so far proven correct-- the Industrial Revitalization
Corp. (IRC) is still muddling about with relatively minor, local
corporate revitalizations.

Given the organization's unimpressive track record to date, Money
Watch believes that any company bought on the possibility of a
revitalization by the the IRC should be shorted, as we first suggested
in early September.

-- Darrel Whitten

Money Watch No. 50

Money Watch No. 43

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Written by Darrel Whitten

Edited by J@pan Inc staff (


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