CONFERENCE CALL: JAPAN’S SUN UNLIKELY TO RISE AGAIN SOON

Government stimulus efforts are likely to keep Japan’s stock market and economy from sliding even further, but don’t expect a rebound in the near future.

Indeed, the outlook for Japan and the rest of Asia is mixed, say executives from Nomura Securities Co. Ltd. of Tokyo and its affiliates. They spoke late last month at a New York conference for advisers sponsored by Charles Schwab & Co.

Much of the region’s progress depends on developments in Japan — Asia’s biggest economy — and a “painful period of economic adjustment” is needed if Asia is to head off “years of stagnant growth,” says Jolly Ng, a portfolio manager at Nomura Asset Management Singapore Ltd.

Japan’s economy is expected to gradually pick up during the second half of fiscal 1998, buoyed by such stimulus measures as tax reductions and a higher level of public-sector spending.

But exports may slow sharply due to the turmoil in the region. Net Japanese exports are expected to fall by a whopping 23.1% during the second half of fiscal 1998, compared to an increase of 19.6% during the first half.

Meanwhile, the Nikkei 225 index — a price-weighted index of the leading stocks on the Tokyo Stock Exchange — is likely to stay within its six-year range of between 14,500 and 22,500 for some time. Stock valuations are at their lowest level in 25 years based on price-to-book and price-to-cash-flow ratios, Nomura executives say.

While government stimulus measures will support the stock market, more structural reforms are needed for it to break out of its doldrums, says Shinya Masaike, a portfolio manager with Nomura Asset Management Co. Ltd. in Tokyo.

Such changes include continuing deregulation, especially in the pharmaceutical and housing industries, and a restructuring of operations and balance sheets in both the private and public sectors, he adds.

In the private sector, companies — including technology giant Fujitsu Ltd., Matsushita Electric Industrial Co Ltd., transaction services firm Mitsui & Co. Ltd. and Mitsubishi Corp., Japan’s largest trader — are gradually moving toward more global standards of management.

They are placing a greater emphasis on shareholder value. What’s more, the seniority system of management is being replaced by more performance-based compensation, such as stock options.

But many domestic firms, especially those in the battered financial services sector, are still hard pressed to compete with non-Japanese companies.

commissions sinking

In fact, the big bang of deregulation is leading to consolidation among Japanese financial services companies, while it is opening doors for foreign competitors. Deregulation of commissions, for instance, has hit Japanese firms especially hard, explains Mr. Masaike, adding that commissions have dropped sharply and are almost comparable to those in the United States.

“Four major securities companies in Japan went bankrupt last year and we see more on the horizon,” he says.

Mr. Ng notes that whereas Japan was one of the top-performing countries in Asia last year, it was among the underperformers in the first quarter of 1998, as measured by the Morgan Stanley Capital International Pacific Index.

Some experts remain optimistic. J. Mark Mobius president of Templeton Developing Markets Trust, who spoke at a recent conference sponsored by Grant’s publications, is bottom-fishing in Japan. “I believe, going forward, they are going to bite the bullet and reform, and come out of this stronger than we ever imagined,” he says.

Other underperforming markets include Indonesia, New Zealand, Hong Kong and Singapore, says Nomura’s Mr. Ng. Meanwhile, South Korea, Thailand, the Philippines, Malaysia, Australia, Taiwan and India were among the top performers for the first quarter. South Korea, says Mr. Ng, is “past its worst.”

in the shadow of japan

The country is able to meet its future funding needs, thanks to increasing reserves and a current-account surplus. But fallout from the beleaguered Japanese economy and yen could pose some serious challenges.

Thailand is another potential bright spot, but it’s too soon to tell if the recovery will last. In the fourth quarter, it posted its largest current-account surplus in 20 years. And a recent string of government policy initiatives including a rise in the limit on foreign shareholding in banks — has been “well received,” says Mr. Ng.

Still, the short-term outlook for Asia is hurt by its dependence on exports. As a result, says Mr. Ng, it can expect “fairly dull” economic growth during the next two years.