The latest Wren Research Portfolio Poll shows
that global equity fund managers once again reduced their exposure
to Japan during the March Quarter 2002. On average, they now hold
just 6.8% of their assets in Japan - a big bet given that it accounts
for around 9.4% of the world share market.
In many ways, this pessimism is understandable. Weak economic figures
and a seemingly endless string of false starts on structural reform
have done nothing for investor confidence. This is clearly reflected
in Japan’s credit rating which was cut again by Moody’s in March
and by Standard & Poor’s in April. Japanese Cabinet Ministers have
expressed anger at the downgrades, pointing out that Japan now ranks
below some of the countries that receive its foreign aid.
In justifying its decision, Standard & Poor’s cited concerns about
the pace of economic reform and highlighted ‘the government’s falling
popularity and the problems that have beset key ministers and aides.’
But these issues are hardly new and if political in-fighting earns
you a black mark, every country is in trouble. While Japan’s banking
and fiscal problems are substantial, the risks of a sovereign debt
default need to be kept in perspective. Japan is still the world’s
biggest creditor nation and has foreign reserves of around A$750bn.
In the financial markets, there are some encouraging signs amidst
the gloom. Note for example the performance of the JASDAQ index,
which comprises mainly small and medium-sized companies. It has
rallied 5.8% so far this year - a stark contrast to America’s NASDAQ
index which has fallen nearly 7.9% over the same period. With US
share prices falling even though a recovery is expected, and Japanese
shares rising even though a recovery is not expected, it will be
interesting to see if equities really are a leading indicator.
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