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Domestic science

Predicting the future is always a tricky business, never more so than when looking at the Japanese market and economy, which is struggling with deflation, rising unemployment, insolvent banks, sliding corporate confidence and now recession.

The effect of September 11 on the Japanese market has mirrored that on Wall Street as the Nikkei tends to rise and fall with the main US indices.

The Japanese market, like the US market, has recovered to a certain extent but the influential export sector has and will continue to suffer from weak US and overseas demand. Many firms are making redundancies, which has dampened consumer confidence.

I expect the Tokyo stockmarket to remain weak in the near term, moving in line with sluggish US and European stocks. The market will continue to be dominated by concerns over the world economy and corporate earnings while the fallout from the September 11 terrorist attacks in the US compounds the subdued mood.

Japan&#39s GDP growth for 2002 is likely to show a negative growth for the third year in a row. The recent upturn in the stockmarket, due mainly to the recovery of US stocks, may have run its course as high-tech valuations have risen to a level where they are no longer attractive.

This means that the market may well consolidate at its current 10,000 level. There could be a weakening in the market by the end of March as cross-share holdings are unloaded and the potential for further bankruptcies of listed companies and aggravated unemployment serve to dampen inv-estor confidence.

The market could well bottom in March, by which point all bad news should have been discounted, a turning point for a gradual trend upwards as progress with economic reform measures takes hold.

However, there is still reason to be somewhat bullish about Japan. Looking at the wider economy and the stockmarket, much will depend on the type of measures that Prime Minister Junichiro Koizumi will take.

The Japanese economy was adversely affected by the September terrorist attacks but I believe investors have more confidence today than they did in 1998.

One key difference between the present and the 1998 rec-ession is the situation with domestic-oriented growth stocks, which have held up well and are hitting new highs.

The government is looking to clean up the mountain of bad debts run up by the country&#39s banks and give individual Japanese an incentive to return to the market.

Koizumi&#39s approval rating sits at 79 per cent, an extremely favourable public position from which to launch reform.

But investors are unlikely to take a positive stance until detailed measures and timelines are announced for economic structural reforms and interim results are announced in mid-May.

Japan is a much more serviceand consumer-oriented society and our focus remains on smaller, high-growth companies in domestic-oriented sectors such as retail/distribution, medical equipment, restaurant and services.

These sectors have been the principal beneficiaries of a new Japan, emerging as a deregulated service and consumer-oriented society.

Companies in these sectors are selling at attractive price/ earnings multiples to their profit growth. We are placing great emphasis on the fundamentals of individual companies rather than on what is happening to the economy.

Our weighted average profit has been 43.4 per cent for the year to March 2002 and 40.1 per cent for the next fiscal year to March 2003 while the weight average p/e multiple is 32.4 times in the current fiscal year and 21.6 times next fiscal year. There is substantial potential for capital growth if these earnings estimates are achieved.

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