Japan: Stock Prices Fall Despite Better Fundamentals

Equity indices are now fighting the historical odds. In other words, since 1900, when stock prices were lower at the end of January and the end of June, the market ended up having a bad year some 21 times out of a total 26 times. Last week, open speculation about a double dip recession in the U.S., essentially all developed economies and China had investors taking more risk off the table. Two-year U.S. treasury yields hit new lows as a "dark cross" emerged in the S&P 500 50-day and 200-day MAs, and the market index was also showing a bearish head-and-shoulders pattern. JPY back to JPY86/USD has Japanese investors flocking back into U.S. treasuries. Bond returns are exceeding stock gains by the widest margin in nine years as investors scramble to preserve capital.

The growth scare is coming from evidence that the global export-led global recovery is losing steam, as manufacturing growth from China, the euro region and the U.S. slowed in June for the second consecutive month. This just after the OECD revised its forecast in late May for GDP growth in the OECD economies from 1.9% to 2.7% percent this year.

Ironically, Japan's June Tankan reading of Japanese business sentiment was a positive surprise, showing the best positive reading in the sentiment index in two years for the larger manufactuers, with a reading of +1 versus expectations of -4 and compared to -14 in March. The reading represents the fifth consecutive quarter of improvement, and large Japanese manufacturers see further improvement to +3 over the next three months. Profits at these manufacturers are now expected to show a 43.8% rise in 2010 versus a 3.7% decline in 2009.

Unfortunately, foreign investors, who are so instrumental in Japanese stock price formation as they own some 26% of the market and account for 40%~60% of trading value on the Tokyo Stock Exchange, suspect the good news about Japan's economy is a lagging indicator to slowing global economic data, even though the ever-cautious BOJ is moving to revise up its forecast for Japan's GDP from 1.8% to 2.5% for FY2010.