TOKYO — Rising confidence that Japan's economic recovery is solid and its banking problems are on the way to resolution underlies a dramatic recent strengthening of the yen and a resurgence in stock prices, analysts here say.
After a wave of economic pessimism swept Japan early this year, the country now is seeing "the end of 'negative irrational exuberance,' " Jesper Koll, vice president of J.P. Morgan Securities Asia Ltd., said, playing off U.S. Federal Reserve Board Chairman Alan Greenspan's widely quoted warning against "irrational exuberance" in the U.S. stock market.
"The strength of the economy [is] increasingly hard to deny," Koll said.
From a post-World War II low of 79.75 yen in April 1995, the dollar soared 60% to hit a nearly five-year high of 127.38 yen on May 1. But now the dollar has suddenly weakened again, falling at one point Monday to 117.50 yen, before rebounding to trade early today at 118.35.
Meanwhile, the Tokyo stock market's widely watched 225-share Nikkei index set a new intra-day high for the year Tuesday, hitting 20,285.53 points before closing at 20,129.11. That was down 14.40 points, or 0.07%, from Monday's close, but still up 16% from the year's Jan. 10 low of 17,303.65.
"The combination of record-low interest rates plus currency depreciation is simply too fundamental a force to not bring change: Japan has generated 1 million jobs in the past 12 months, domestic capital formation is accelerating, and Japanese products are gaining share in an accelerating global economy," Koll said.
Analysts generally expect low or even negative growth in the April-June quarter, due to sales and income tax increases April 1 and cuts in government spending. But most observers expect growth to pick up again in the summer or fall.
The stock market's surge also reflects new investor confidence that many Japanese banks will report hefty operating profits for the fiscal year ended March 31--and will use those profits to write off a big chunk of the bad loans plaguing Japan's financial system, said Alicia Ogawa, banking analyst at Salomon Bros. Asia Ltd.
The Japanese banking system is burdened with about $250 billion in bad loans, according to official figures, and some private analysts say the real figure could be twice that much. But analysts say the size of the problem is being reduced--and that many investors have suddenly swung from excessive pessimism to strong optimism.
"From talking with clients and looking at what's gone on in the stock market the past two weeks," it appears that most investors "want to embrace the view that the bad-loan problem is history," Ogawa said.
The yen's new strength was triggered by comments last week from Japanese officials, including Eisuke Sakakibara, a key Finance Ministry bureaucrat who set off massive yen buying by saying Thursday that the currency "could theoretically appreciate to 103 yen to the dollar over the next year."
Then on Friday, Finance Minister Hiroshi Mitsuzuka hinted that the central banks of Japan, the United States and Germany might take coordinated action to support the yen. Last month, Group of Seven finance ministers in Washington pledged to monitor the yen and cooperate as appropriate.
Mitsuzuka said Tuesday that the yen now has "almost reached a desirable level."
Japan's determination to halt the yen's weakening is largely based on fear that too weak a yen will lead to such a tremendous surge in Japanese exports that trade frictions with the United States will reignite, analysts say.
"If Japan's trade surplus expands too much, the U.S. government will be unhappy," noted Harumi Ichiki, an analyst at Sumitomo Life Research Institute. "To prevent this, the Japanese government is trying to get the exchange rate to settle around 115 yen, at which level Japanese companies would still be competitive." But given the benefits of a weaker yen to Japan's economy, officials would not have dared to push so hard to boost the yen toward the 115-yen level unless they felt confident of the economy's underlying strength, Ichiki said.
"Since stock prices are going up, the Japanese government can afford to try to correct the weak yen," he said. "The improved situation allows the government to respond to the demands from the U.S. side."
Meanwhile, rising stock prices are shoring up the banks. Stock prices have a direct relationship to Japanese banks' financial health because banks generally hold huge stock portfolios. Unrealized capital gains form an important part of many banks' assets and, when realized, they can be used to write off bad loans.
Among Japan's top 20 banks, even the weakest ones have latent profits when the Nikkei index is above 18,500, according to J.P. Morgan estimates. These 20 banks account for about $200 billion, or 80%, of Japanese banks' officially acknowledged problem loans.
J.P. Morgan's Koll calculates that Japan's 20 leading banks, on average, are posting operating profits at a rate that would enable them to write off their reported bad loans by mid-2000.
Etsuko Kawase of The Times' Tokyo bureau contributed to this report.