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Friday, Jan. 25, 2008
MAJOR BANKS LESS AFFECTED
Insurers' unrealized profits slashed by Nikkei slide
Stock investors in Japan may be breathing a sigh of relief after the key Nikkei index regained the 13,000 line Thursday. But economists say it is still hard to see Japan's financial sector rebounding to a healthy state in the near future as heavy selling of Tokyo stocks earlier in the week largely dented their unrealized profits.
On Thursday, the 225-issue Nikkei stock average jumped 263.72 points, or 2.06 percent up from Wednesday, to 13,092.78 on speculation of a possible bailout of U.S. bond insurers that should restore confidence in the global financial system.
Eiji Kinouchi, a senior strategist at Daiwa Institute of Research, said many investors now feel stock prices have hit bottom.
Kinouchi said the recent stock fall has offset the rise in stocks the market experienced in September 2005, when many investors, especially foreign ones, bought Japanese stocks amid rising expectations of structural reform after then Prime Minister Junichiro Koizumi's Liberal Democratic Party won the Lower House election.
"Such expectation has shrunk and now Japan is seen as a nation slow in carrying out reform," Kinouchi said.
The Nikkei index dropped about 1,300 points earlier this week, slumping from the Jan. 18 close of 13,861.29 to close at 12,573.05 Tuesday.
Although the benchmark index recovered the 13,000 level Thursday, the conditions of Japan's financial sector don't appear rosy, as the recent stock price plunge erodes the profits of insurance companies, Japan's major institutional investors.
Asahi Mutual Life Insurance Co., a medium-size life insurer, said its unrealized profits on its domestic stock investments turned to losses when the Nikkei average dipped below 12,900.
This means its unrealized profit was near zero as of Thursday's close.
"If the stock prices fall, our unrealized profits will decrease," said Osamu Kitajima, spokesman for Asahi Mutual. "The situation is severe."
Sumitomo Life Insurance Co. said its unrealized profit in stock investment will turn to losses if the Nikkei index falls below 10,500.
However, profits seem more secure for bigger life insurers.
Nippon Life Insurance Co., the nation's biggest life insurer by net premium income, said its investment will not incur losses unless the Nikkei dips below 7,600, while the figure was 8,700 for Dai-ichi Mutual Life Insurance Co.
But insurance companies are not the only ones suffering.
Unrealized profits on stock investments for the nation's six major banking groups dropped 57.5 percent from about ¥8 trillion at the end of September to ¥3.4 trillion as of Tuesday's close, according to an estimate compiled by Dai-ichi Life Research Institute Inc.
The six banking groups are Mizuho Financial group, Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group, Resona Holdings Inc., Sumitomo Trust & Banking Co., and Chuo Mitsui Trust and Banking Co.
But the research institute also said the banking groups will not incur unrealized losses unless the Nikkei falls below 9,900 because of their abundant equity capital.
Analysts claim the Bank of Japan may try to slash its benchmark interest rate in the future if the stock price plunge continues to damage the economy.
"There is a possibility that the BOJ will cut the interest rate," said Hideo Kumano, chief economist at Dai-ichi Life Research Institute. "But I don't think the central bank will come to that conclusion right now."
Kumano added that the BOJ may cut the interest rate when there is a clear sign of an economic slowdown, such as a rapid appreciation of the yen to around 100 to the dollar, or when the gross domestic product shows negative growth for two quarters in a row.