Foreign investors have now become net sellers of Japanese equities for the first time in three years as evidence mounts that the economy may be slowing, according to the July 2006 Market Outlook from Barclays Global Investors.
Sentiment has “nosedived” among foreign investors, who helped propel the market 40 per cent higher last year, according to Barclays’ chief economist Haydn Davies, writing in the report.
“Although the Japanese stock market cannot match the Turkish market’s 20 per cent plunge this year, the Tokyo market has been the worst performing developed market.”
Davies said investor sentiment has not been helped by a series of financial scandals this year, beginning with the collapse of Internet stock Livedoor in January.
“More recently we saw the arrest of prominent fund manager Yoshiaki Murakami for insider trading, a scandal in which the Bank of Japan’s governor, Toshihiko Fukui, has also become embroiled.”
He said the Japanese equities market was expected to continue to underperform in an economic climate that has softened since the beginning of the year.
“Economists are on average expecting the economy to grow 3 per cent this year, but both industrial production and activity in the service sector has slowed a little in recent months, and growth in the volume of retail sales has all but dried up.”
The report found Japan’s outlook has also begun to deteriorate as a result of Chinese authorities taking measures to cool their overheating economy.
“The last time the Chinese tried to engineer a soft landing, demand for Japanese heavy machinery slowed sharply and the Japanese economy all but stagnated,” Davies said.
Released before the Bank of Japan increased interest rates by 0.25 per cent last week, the report also found the softer economic outlook has also begun to “cloud the interest rate outlook”.
It found that the bank was expected to proceed with an interest rate hike, but is increasingly likely to “tread cautiously” on interest rates.
