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New York Markets After Hours

July 5, 2003, 5:39 p.m. EDT

Time to invest in Japan?

Fund managers perk up as Nikkei climbs

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By Barbara Kollmeyer and Allen Wan

LOS ANGELES (CBS.MW) -- A 13-year bear market has long kept foreign investors away from a beleaguered Japan, but the situation may be shifting, with foreign investors in the driver's seat of a recent rally.

Last week, the Nikkei soared past 9,800 to hit a 10-month high, in the wake of data showing strong gains in May industrial output and more importantly, surprising improvement in Japanese corporate confidence.

The biggest beneficiaries of the rally have been banks and technology exporters. Banks like Mizuho /zigman2/quotes/202653786/composite MZHOF -2.15% have rebounded on investor expectations that the Japanese government will take aggressive steps such as bailouts to prevent the big banks from collapsing. Last month, it bailed out Resona /zigman2/quotes/203178794/delayed JP:8308 -0.22% , Japan's fifth biggest, without a peep from the public.

Techs like NEC , Fujitsu /zigman2/quotes/204809476/composite FJTSF -0.08% and Sony , meanwhile, have been boosted by the Nasdaq's own rally, as well as signs of an uptick in chip demand, an improving global economy and the weaker yen, which makes their goods more competitive overseas.

Local investors appear to be standing on the sidelines, however. Foreign investors were net buyers for 10 straight weeks into the third week of June, with aggregate net buying on Japanese stock markets reaching 2 trillion yen in June, according to Merrill Lynch data.

"The equity rally is due mainly to purchasing by overseas investors on hopes for the Japanese economy and the inexpensiveness of Japanese shares," said Atsushi Mizuno, chief economist at Deutsche Bank in Tokyo.

Rally risks remain, though. Bleak U.S. jobs data helped take a bite out of the longer-term upturn on Friday, though analysts say it's likely to resume next week. See full story. Another potential danger is investors dumping shares of Japanese banks on worries that the sliding bond market could hurt their balance sheet. The megabanks are among the biggest investors in Japan.

Improvement on a relative basis

The long downturn in Japan has been peppered by rallies, in the springs of 2001 and 2002, neither of which could be sustained. In the last quarter, the Nikkei gained 14 percent -- not bad, but not as good as other markets in south and southeast Asia. U.S. funds investing in Japan rose 12.81 percent in the second quarter, versus an 18.9 percent gain for world equity funds, according to Lipper.

Martin Vostry, research analyst at Lipper, said the second-quarter gain, the third worst of all fund categories, is still the best since the fourth quarter of 1999. Funds returned 23.64 percent between the fourth quarter of 1998 and the fourth quarter of 1999.

"I would say (Japan) is a risky investment from a mutual fund investment perspective, but potential for return is there. If someone is looking to get in at a potentially low point and ride it up, there's good potential for that ... but it's risky and volatile," said Vostry.

Martin Schultz, director of international equity markets for Cleveland-based Armada Funds, has recently moved to overweight Japan to 27 percent from 20 percent in May, versus the benchmark of 19 to 20 percent. He believes staying away from Japan is riskier.

He said there are some encouraging structural moves by the government going on, for example, the fact that it's taking nonperforming bankrupt companies and selling them off. In the past, it would keep the companies afloat, letting banks lend to them, creating a cycle of no growth, no lending.

"The other issue, technically speaking, is that it's been a bear market for so long, historically it's very cheap and more importantly, everyone is underweight," said Schultz.

Indeed, Merrill Lynch Chief Global Investment Strategist David Bowers said Thursday that the brokerage giant is upgrading Japanese equities in its global portfolio to "neutral" from "underweight." Although the global economy is not as robust as it would like, Merrill said it's "hard to ignore" falling prices in the Japanese bond market as money shifts into stocks. Bond yields have more than doubled from a low of 0.43 percent to 0.89 percent in recent weeks and prices have fallen 4 percent, not including a big move downward on Thursday.

US : U.S.: OTC
$ 11.36
-0.25 -2.15%
Volume: 3,700
June 21, 2022 10:07a
P/E Ratio
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Market Cap
$28.91 billion
Rev. per Employee
JP : Japan: Tokyo
¥ 507.00
-1.10 -0.22%
Volume: 9.45M
July 1, 2022 3:00p
P/E Ratio
Dividend Yield
Market Cap
¥1217.52 billion
Rev. per Employee
US : U.S.: OTC
$ 125.16
-0.10 -0.08%
Volume: 2,038
July 1, 2022 3:34p
P/E Ratio
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Market Cap
$24.73 billion
Rev. per Employee
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