Japanese market hit by economic uncertainty

In common with many other major equity markets, Japanese share prices ended June firmly in negative territory as concerns over the prospects for the global economic recovery continued.

The Nikkei 225 Average index fell by 4% over June, the third consecutive month in which the benchmark index had declined. Unexpectedly disappointing consumer confidence and unemployment figures from the US weighed on share prices in Japan – and across the world – amid renewed concerns over whether the US economic recovery is capable of being sustained.
These concerns eroded investors’ confidence, leading them to avoid relatively risky assets. Towards the end of the month, trading volumes dwindled as investors awaited the results of the important quarterly Tankan survey of corporate sentiment, which was due for release at the beginning of July.

A survey conducted by the Ministry of Finance and the Cabinet Office’s Economic and Social Research Institute showed that large Japanese manufacturers have become more optimistic about prospects for the business environment. However, towards the end of the month, the strong yen led the share prices of exporting companies to fall.

During the month, Japan’s new prime minister Naoto Kan cautioned that Japan was at risk of “fiscal collapse” if the problems of mounting public debt continue to be neglected. Nevertheless, despite prospects of a programme of measures aimed at reducing public debt, investors did not appear to be excessively disheartened by his warning.

Economic growth expanded during the first quarter of 2010 by a larger-than-expected 5%, year on year. Meanwhile, consumer confidence reached its highest level since October 2007 during May as individuals became more optimistic about the outlook for employment.

Retail sales in Japan grew at their slowest rate since January during May as the effects of fiscal measures to prop up the economy began to diminish. Prices remained on a downward trajectory, falling for a fifteenth consecutive month during May. Minutes from the Bank of Japan’s May meeting showed monetary policy committee members voted unanimously to hold interest rates at 0.1%.
Over the second quarter of 2010 as a whole, the Nikkei 225 posted a drop of more than 15% – Japan’s worst quarterly performance since late 2008, following the collapse of Lehman Brothers. According to data from the Investment Management Association (IMA), Japanese equity funds were out of favour with investors during May, and both Japan and Japan Smaller Companies figured among the worst-performing IMA sectors during that month.