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Monday, May 19, 2003

JAPANESE PERSPECTIVES

It's time to meet expectations by installing stock-market package


Japan managed to avoid the so-called March crisis as share prices picked up temporarily toward the end of the month. However, the stock market remained in a slump in April, with the Nikkei average dipping at one point to the 7,600 range.

When people talk about the implementation of measures to prop up share prices, the widespread image they have is that the government is again trying to introduce near-sighted steps that run counter to market principles.

Prime Minister Junichiro Koizumi has admitted there is no magical cure for the stock market, and that all he can do is promote structural reforms. If share prices were to correctly reflect the outlook for corporate earnings, it would be best to leave everything to the natural forces of the market and eschew government intervention.

However, recent share prices do not seem to be mirroring the real condition of the Japanese economy. Even though the global economic outlook remains clouded by such uncertainties as SARS, various estimates, including the Bank of Japan's quarterly "tankan" survey, show that profits at Japanese firms are believed to have risen by more than 10 percent year-on-year in fiscal 2002 and are expected to do the same in fiscal 2003.

Then why does the stock market slump continue? One major reason is the deteriorating supply-and-demand balance in the market. This problem has been going on for years, but today the situation is being complicated by a plethora of negative factors.

Having a particularly serious impact on market sentiment are moves to limit banks' shareholdings and the banks' efforts to unwind cross-held shares. Following the same trend are the life insurance companies, which are reducing the proportion of stocks in their investment portfolios. With such a combination of factors at work, we cannot simply say share prices should be left to natural market forces.

On April 14, Nippon Keidanren and two other business organizations compiled a set of requests for emergency tax measures to prop up the stock market. They proposed lowering the inheritance tax appraisals on shares of listed firms purchased in fiscal 2003, allowing exemptions on dividends and other capital gains made on such transactions, and taking measures to allow losses from stock transactions to be deducted from income.

It is unusual to make such requests just after a new securities tax system has been introduced, but the move illustrates how concerned these groups are about the current condition of the stock market.

In a meeting May 8 of the government's Council on Economic and Fiscal Policy, members from the private sector submitted a set of proposals to prop up the stock market. This led to a series of meetings in the Cabinet that resulted in a basic outline for bolstering the stock market.

While the details of those steps are unavailable, and it still remains unclear how effective they will be, it is at least significant that the government has finally gotten serious about tackling the woes of Japanese stocks.

Following these developments, the market has been on an uptrend since late April. According to an econometrics method called "event study," the large-scale stimulus measures introduced by the Japanese government in recent years have had little impact on the stock market because they were judged as running counter to structural reform.

But the recent trend suggests that this time, the market is receptive to the government's position. The government should not betray the market's expectations and should steadily and quickly implement the proposed steps.

Surveillance of trading activity should also be tightened to ensure the healthy development of the market. We are still seeing dangerously speculative short-selling going on, and a new surveillance mechanism, possibly modeled after the one used by the Securities and Exchange Commission of the United States, should be considered.

Yoshio Nakamura is a senior managing director of Nippon Keidanren.


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The Japan Times

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