Have Japanese equities hit bottom yet?

March 31, 2008
By Ken Worsley

Today was the last day of financial 2007, and the Nikkei Index dove 294.13 points to finish at 12,525.54 - marking a 27.5% decline since April 1, 2007. To make matters worse, paper gains on shareholdings at Japan’s six major banking groups dropped by 62% over the same time period, according to the Nikkei. This was the first time that unrealized profits from equity holdings declined at the six major banks since 2003. On the other hand, the same six banks saw 100 billion yen in paper gains in bond holdings, the first time they’ve been in positive territory since 2002.

At the same time, the Nikkei also estimates that the market value of shares held by publicly traded firms in Japan declined 30% in fiscal 2007. This would represent a loss of 8.7 trillion yen of (paper) wealth. There seems to be heightened risk developing if the Nikkei should move lower, as many Japanese firms are boosting their cross-shareholdings in an effort to thwart would-be takeover attempts.

Firms engaged in cross-shareholding were hit hard, with Toyota losing 32% of the value of its equity holdings, to the tune of 360 billion yen.

At the same time, the value of mergers and acquisitions dropped 28% in fiscal 2007, according to Recof. Financing and fundraising have not been easy tasks in the post-subprime meltdown environment.

So, the question waiting to be asked is whether or not the Nikkei has hit bottom. Will foreign investors flock back, motivated by discounted shares and valued-based investing? Not yet.

Subprime has not yet been worked through, and it’s hard to see quite the same degree of leveraged financing to come back just yet (though it will eventually). Increased cross-shareholdings are not a welcoming sign. The strength of the yen makes Japanese exporters seem unattractive (though this should be helped to some degree by an upturn in share prices), and there is still the specter of “political instability” putting fear into those who feel Japan’s single-party government was somehow prepared for the challenges of the 21st century. Not to mention, some ugly, ugly annual reports are going to be coming out soon.

This isn’t quite the bottom. I don’t like making predictions, but I don’t think we’re too far off from the bottom. There are already some great buying opportunities (and when you start to hear about it in the mainstream press, it’s too late), but we’re just not quite all the way there yet.

Filed Under Equity Markets, Finance, Nikkei