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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

SEPTEMBER 24, 1999 VOL. 25 NO. 38

Why Japan Is Recovering
A star manager on restructuring and the yen

Foreign funds are pouring into Japan after GDP growth figures, announced last week, confirmed that the country has pulled out of recession. But the wall of money is driving the yen higher against the dollar, raising fears that a super-strong currency may hold back the recovery. Campbell Gunn, 43, believes the worries are overblown. He is the Tokyo-based chief investment officer of fund-management firm Dresdner RCM Japan and runs the highly successful New Tiger Japan fund. Gunn spoke with Asiaweek's Assif Shameen.

Is the recovery for real?
The fiscal-stimulus package and public-works expenditures heavily influenced January-March GDP growth [of 2.0%]. That's why people expected a weaker number in the April-June period. But there was a surprising recovery in consumption that drove April-June growth [of 0.2%]. The government has been trying to engineer a recovery with an official 0.5% growth target for all of 1999. It's quite likely Japan will exceed that target.

But it cannot rely on exports to do that. Exports have been flat in volume terms recently, and with a strong yen, it is going to be even more difficult for Japan to export its way out. Japan has to look domestically for recovery, which is what the Americans have been pushing them to do. One way is through capital spending, but many companies are restructuring so they just can't do that. The other route is public-works expenditure. It is now likely that we will see another fiscal-stimulus package soon because the government wants to make sure the recovery is sustainable.

Consumer confidence is improving. The wealthy in Japan have benefited from the tax cuts of last year and have seen property prices stabilize somewhat. Those who own shares [are feeling more confident] as the Japanese stock market recovers, especially the small and mid-cap stocks. Poorer Japanese are not spending much because unemployment is still high. The average citizen is still likely to see a wage cut this year, but he is spending. We are seeing a decline in the savings rate of average households.

The yen is up from 147 to the dollar 13 months ago to 106 this week. Will this derail the recovery?
A strong yen certainly damages confidence in the stock market because a large portion of the earnings of top companies like Sony, Toyota and Matsushita are from overseas. So far, the market has ignored this because there is belief that the future of these companies is in expanding their business in Japan. As long as they come up with new products that keep sales and profits growing domestically, they might be okay. Sony, for example, has just announced a new Playstation.

Foreigners are continuing to buy into Japan because they believe a recovery is underway. That is strengthening the yen. Many may end up making more money from the exchange rate than the underlying equities. The strong yen is forcing Japan to restructure domestically. Restructuring makes Japanese companies more attractive and that makes the yen even stronger. But if the yen were to strengthen above 105 to the dollar, many Japanese firms will have problems. At 110, most exporters could make money. At 100, a lot of them will struggle. The Bank of Japan hasn't intervened aggressively, but I suspect it will at 105.

Has Japan made much headway in corporate restructuring?
Radical restructuring in an economy that is mired in deep recession can be destabilizing. It implies capital-expenditure cuts, cost-savings and unemployment. That is why Japan hasn't been pushing hard. That is not to say there has been no restructuring in Japan. It's been clear to Japanese companies that if they do the right thing and restructure, they will be awarded with a high stock price. Many have restructured, perhaps not in the way that foreigners might have wanted them to, but they still have enhanced shareholder value by increasing return on equity and return on assets. Some companies with strong cash flows and a clear vision didn't really need to restructure much because they never were in old and dying industries. Many companies have restructured by reallocating capital to new areas of the economy.

What sectors do you like?
The sectors that have been doing well are the ones that have anything to do with services, software, technology and financial services, like consumer-finance companies. Some of the retailers are doing well. My own investing bias is towards smaller or mid-cap companies rather than large companies in the Nikkei 225. I'm not too excited about the cyclical companies just yet. I am not too keen on big exporters, but there are some that are reinventing themselves and have new products coming onstream like Sony.

Where will the Nikkei be in a year or two?
I don't like predicting indices. I'm a stock picker. I favor growth stocks, domestically-orientated companies and those in technology. I like the Internet and e-commerce area, but some of those stocks now have very high valuations. The OTC [Over-the-Counter] Index has gone up nearly 250% from its lows last October in yen terms. Clearly, we are not going to continue with that sort of upside, but there are still some cheap OTC stocks. As the recovery takes hold, some of the smaller companies will grow fairly strongly.

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