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Last Updated: Jan 23, 2008 - 8:59:58 AM |
The Irish Independent reports that homeowners are poised to benefit from the first cuts in interest rates for four-and-a-half years, as a direct result of global stock market turmoil.
The European Central Bank (ECB) is expected to begin cutting rates as soon as April, following the dramatic 0.75pc slash in US rates yesterday.
This helped the Irish stock market rebound yesterday, as it added 3.7pc to its value. But the markets meltdown of the past three weeks has wiped €10bn off the value of Irish pension funds.
However, the deepening global market turmoil will spark a reduction in European interest rates. That will reverse a trend for hard-pressed mortgage-holders here, who have been hit with eight rate hikes over the past three years.
The vast majority of leading Irish economists surveyed by the Irish Independent last night predicted rates would fall by 0.50pc by the end of the year.
This would shave €90 off the average monthly mortgage and provide a boost for the flagging property market, which has seen average house prices plummet by up to 10pc over the past year.
"I have felt for a long time that rates in Europe have peaked. We will get at least a 0.50pc cut and the markets now think that,"Bank of Ireland Chief executive Dan O'Loughlin told the Irish Independent.
Billions of euro have been wiped off global stock markets this week after sustained sell-offs in shares. The panic share-dumping prompted the US to order the largest cut in interest rates in almost 25 years.
But, despite growing economic uncertainty, Irish homeowners will welcome the predicted ECB interest rate cuts.
Two interest cuts, totalling 0.50pc, by year's end will take ECB rates back to 3.5pc. This would translate into a typical interest rate for borrowers of 4.5pc, compared with the current 5pc.
Significantly, it could signal a return to the housing market of thousands who have been waiting for a signal that interest rates are on the way down.
Finance Minister Brian Cowen last night tried to play down growing economic uncertainty, after he met EU counterparts to discuss the turmoil engulfing European markets.
He urged the public to remain calm and not to "overreact" to one bad day on the stock markets.
"We can't control the exchange rate. We don't control interest rates,"he said.
"We have to ensure we remain competitive and get through this situation on the basis of a good, sound financial situation."
Robust
Taoiseach Bertie Ahern also insisted the economy was robust enough to weather the international economic storm.
"The basis of our economy remains strong,"he said. "We have a dynamic and dedicated workforce, very strong foreign direct investment strategy in the country this year -- we are looking good on that too.
"We have flexible markets which allow us to respond effectively to adverse developments when they happen. We have a low debt-GDP ratio. So, unlike 15 or 20 years ago, or even 1987, when we had a big crash, we are in a strong position."
However, the opposition last night accused the Government of not having a clear plan.
Fine Gael deputy leader and finance spokesman Richard Bruton accused Mr Cowen of going to ground following a "hit and hop" budget.
"No-one expected an Irish minister for finance to rectify downturns in the global stock market, but there has been no preparation to protect our competitiveness, control public spending and deliver real value for taxpayers," he said.
Meanwhile, economists here predicted oil prices would continue to fall. The price of US crude oil fell as low as $86.11 yesterday.
The Irish Independent also reports that Aer Lingus yesterday warned cabin crew that an extension of the current pay freeze will become their "contribution" to cost cutting, unless they change their "very disappointing" position on the airline's rationalisation plans.
The airline and its staff have been locked in a dispute on €20m worth of cost cuts for more than a year now, with trade unions bitterly resisting Aer Lingus' Programme for Continuous Improvement (PCI).
Last October, on the eve of wage increases due under the national wage agreement, Aer Lingus told staff it would withhold the rises until the cost cuts have been achieved.
Trade unions have recently asked Aer Lingus to attend talks on the pay freeze. However Aer Lingus yesterday said it was unwilling to attend any such meetings in the current climate.
In a letter to Impact's Shay Cody, Aer Lingus chief executive Dermot Mannion also expressed his disappointment with the lack of progress, in particular with cabin crew.
"It is clear that the (Cabin Crew) Committee are unwilling to commit to any of the cost-saving measures contained in either LCR18850 (Labour Court recommendation) or any of the Company's PCI proposals on working condition rule changes,"he said.
"This complete absence of meaningful engagement on PCI cost savings combined with the disregard of Labour Court Recommendations and the outcome of the recent National Implementation Board process places us in a very difficult and regrettable situation.
"I must therefore confirm that we cannot consider attending the LRC on the matter of the pay freeze until these other matters are addressed."
Mr Mannion also noted that unless agreement on the cuts was reached by the end of January, "cabin crew will forgo phases 2 and 3 of 'Towards 2016' pay agreement and this will be considered as the cabin crew contribution to PCI-07 staff cost savings".
Mr Mannion said similar terms would apply to pilots should agreement not be reached by the end of January. The next pay increase is not due to be implemented until April, however, and both sides are hopeful of a resolution to the pilots' issues before then.
The airline's superintendents have recently hammed out a revised PCI agreement. Mr Mannion said their pay freeze would be "lifted immediately on agreement of the terms of this" agreement.
Impact spokesman Niall Shanahan said members would meet next week to discuss Mr Mannion's letter. "We're disappointed and surprised, but we won't be making any decision on a response until after we talk to our members," he added.
The Irish Times reports that EU finance ministers have warned that the US economic slowdown and ongoing turbulence on world stock markets will dampen economic growth throughout Europe. But they also said Europe's economic fundamentals remained strong and downplayed the risk of an economic recession at a finance ministers meeting in Brussels.
"Tensions in financial markets are still there. Our growth rates in 2008 will not be as high as we were expecting in November," said EU Monetary Affairs Commissioner Joaquín Almunia, who called for a "calm and serene" reaction to the current turbulence.
Chairman of the Eurogroup of finance ministers, Luxembourg prime minister Jean-Claude Juncker, said the sell-off on global stock market was partly irrational.
"When financial markets act irrationally, and are driven by herd behaviour, when stock markets demonstrate short-termism, there is no reason for finance ministers to do the same,"said Mr Juncker, who stressed that Europe could withstand a US recession.
"The economic situation in the US is in no way comparable with that in Europe or the euro zone,"he said. "We feel comfortable with our economic situation at the moment. The economic situation in Europe seems to be uncoupled from the situation in the US." French finance minister Christine Lagarde underlined this point to reporters, noting that just 8 per cent of French exports were destined for the US market. "Even if the United States goes into recession. . . it's not a tragedy in itself," she told reporters at the meeting. The comments from ministers came before the US Federal Reserve slashed its interest rates by 75 basis points in a surprise move that caused stock markets to spike upwards.
European Central Bank president Jean-Claude Trichet and International Monetary Fund boss Dominique Strauss-Kahn attended the finance ministers' regular monthly meetings in Brussels too but did not make any comments.
However, ECB executive board member Jürgen Stark later made calls for calm and composure in an interview on German radio.
"The markets are very nervous. They get new information every day and are very sensitive to it, perhaps excessively so," said Mr Stark.
"This high volatility that we see is certainly not helpful but on the other hand, one should not exaggerate events."
The Irish Times also reports that targets to cut greenhouse gas emissions and boost the use of renewable energy in an EU plan to be published today could cost Ireland as much as €1 billion per year.
The climate change strategy will also result in increases in electricity and fuel prices for consumers, although the European Commission argues that not taking action would cost more in the long term, according to an impact assessment carried out by EU officials.
The commission estimates its strategy to curb CO2 emissions will cost €60 billion per year across the EU. This works out at an average of 0.5 per cent of EU gross domestic product (GDP), with Ireland facing an annual bill of about €950 million until 2020.
The cost of the strategy, which should cut EU emissions by 20 per cent by 2020, will be shared by consumers and businesses.
But the commission argues that taking no action could increase costs to 5-20 per cent of GDP by 2020 because of climate change and higher oil and gas prices. The union will also benefit from being less reliant on oil and gas imports and should save up to €50 billion in fossil fuel costs.
Under the EU plan the Government will be told to cut greenhouse gas emissions by up to 20 per cent by 2020, compared with the level of emissions generated in 2005. It will also have to generate 16 per cent of its energy needs from renewable energy, a significant increase on the 2 per cent currently produced.
Ireland faces among the toughest targets under an EU burden-sharing agreement that is designed to ensure that the richest member states bear the brunt.
Minister for Finance Brian Cowen, who was in Brussels yesterday at an EU finance ministers' meeting, said it was important that the commission proposal on climate change was a fair and transparent outcome for all states. He admitted it was a "very challenging agenda".
"It is not simply about certain tax issues or proposals, it is about a change of lifestyle by all citizens. A contribution must be made by everyone in terms of our lifestyle quite apart from what government can achieve," said Mr Cowen, who insisted that there were no divisions between Fianna Fáil and the Greens on the EU proposals.
Meanwhile, the commission watered down elements of its strategy yesterday in an attempt to ensure that energy-intensive businesses do not simply relocate overseas to states such as China and India to avoid the tough emissions cuts. It has agreed to give energy-efficient industries such as cement, steel and aluminium companies more time before they have to purchase permits from governments to enable them to emit CO2.
The Irish Examiner reports that Irelandis more exposed than most other eurozone countries to the ill-effects of a down turn in the US economy, but a recessionis in no way inevitable, according to Finance Minister Brian Cowen.
The country, and the eurozone generally, was never in as good an economic condition to withstand the cold draft from the plunging world stock markets and the pessimism over the US economy, he said.
But there would be repercussions and it was essential in this climate to exercise wage restraint, in a reference to next month’s social partnership negotiations, and increase productivity Mr Cowen said.He was echoing statements made by the president of the European Central Bank Jean Claude Trichet earlier this month and by Jean Claude Juncker, chairman of the Eurogroup Finance Ministers yesterday.
Ministers had extensive discussions on the world economic situation over lunch at their monthly meeting in Brussels yesterday after the US Federal Reserve announced a 0.75% cut in interest rates to 3.5%.
Mr Cowen said he hoped the Fed’s move would have a beneficial effect but added: “It’s important that people do not see an immediate read across from the US with what will happen in Europe, because there are significant differences.”
He said it was important not to overreact and stressed that the economic fundamentals throughout theeurozone and in Ireland were sound with low budget deficits, low GDP-debt ratios and exports worth more than imports.
Growth expectations for Ireland have already been cut by the Commission to 2.2%, compared to 4.75% last year, but with 20% of trade with the US the country was more exposed.
“We need to make sure we deal with the situation sensibly to maintain our position. Pay negotiations start next month and all the constituencies will bring their own agendas to the table. But the best way of maintaining and improving standards of living is to increase and improve our productivity”, he said.
Ireland had a zone of stability within the euro area which was one of the benefits of belonging to a larger economic unit, he said.
The EU Economic and Monetary Affairs Commissioner Joaquin Almunia, said: “Big imbalances have been created, have built over the years in the US economy — a big current account deficit, a big fiscal deficit, a lack of savings. This is not at all the situation in our European economies. Our fundamentals are solid.”
The Financial Times reports that European policymakers on Tuesday blamed the turmoil in global equity markets on US economic and fiscal policy and said Europe’s economy was resilient enough to emerge without great damage.
“The main reason [for the turbulence] is the risk of a recession in the US,”said Joaquín Almunia, the European Union’s monetary affairs commissioner.“It’s not about a global recession. It’s about a recession in the US, because big imbalances have built up over the years in the US economy – a big current account deficit, a big fiscal deficit and a lack of savings.”
He was speaking in Brussels as the US Federal Reserve announced an emergency interest rate cut of 0.75 percentage points.
Asked to comment on the Fed’s action, Tommaso PadoaSchioppa, Italy’s finance minister, said: “I don’t think the events of the last 24 hours change fundamentally the assessment. A correction is under way, a correction to important imbalances.”
Mr Almunia suggested that, if European economic growth should be below potential this year, the European Commission might relax its insistence that governments balance their bud-gets as promised by 2010.
Officials said countries with healthy public finances, such as Germany, would be better placed than others, such as Italy, to cushion the impact of economic shocks by letting automatic fiscal stabilisers come into play to offset lower revenues.
Angela Merkel, the German chancellor, on Tuesday urged small investors not to panic in the light of this week’s stock market plunge.
“There is no sign of a recession in Germany . . . Citizens should under no circumstances make hasty decisions,” she told a radio interview. “We are discussing whether any measures need to be taken. But remember financial markets are independent.”
Peer Steinbrück, the German finance minister, added:“It is true that the US is facing a possible recession . . . but we have no reason to become nervous. The economic fundamentals of Germany and Europe remain good.”
Mr Almunia contrasted imbalances in the US economy with what he described as Europe’s“solid, sound fundamentals”.
“We have a positive current account position. We have a level of savings that is the level required to finance our investments. We have improved our fiscal positions a lot. Moreover, we haven’t got subprime mortgages in our financial systems,”Mr Almunia said.
“So we are well prepared to weather this situation, even if we cannot ignore the risk of our growth rates being affected by this turmoil.”
He denied, however, that he was gloating over the US economy’s troubles. “I’m not engaged in any criticism,” he told reporters after a regular monthly meeting of the EU’s 27 finance ministers.
“These [US] imbalances are the root cause of the current turbulence. It’s not the only reason, but it’s the basic cause.”
Earlier, Jean-Claude Juncker, chairman of the 15-strong group of eurozone finance ministers, said Europeans could afford to be less concerned than Americans about the risks to their economy.
“We have to be concerned, but a lot less than the Americans, on whom the deficiencies against which we have warned repeatedly are taking bitter revenge,” he said. “We are much better placed in the eurozone and in Eur-ope than our US friends are.”
Nevertheless the European Commission and ECB, as well as private sector forecasters, are reducing their estimates of European economic growth this year.
Growth is expected to be 1.8 per cent or less, compared with 2.6 per cent in 2007 and a Commission forecast in November of 2.2 per cent this year.
The FT also reports that the steep cut in US interest rates intensified the pressure on the European Central Bank to soften its hardline stance and pave the way for eurozone borrowing costs to fall as well.
The ECB dislikes any suggestion of being pushed around by financial markets or politicians. But it is aware that the economic outlook for the 15-country eurozone could change in the light of US events and that its reaction might have a direct impact on market nerves.
Financial markets on Tuesday fully priced in a quarter percentage point cut in ECB rates to 3.75 per cent by May. “The pressure for a careful and timely recalibration of their rhetoric has clearly increased,” said Marco Annunziata, chief economist of Unicredit.
The ECB’s focus, in public at least, will remain on inflation – which at 3.1 per cent remains far beyond its target range of an annual rate “below but close” to 2 per cent. But ECB president Jean-Claude Trichet’s warning less than two weeks ago – when he said “pre-emptive” interest rate rises were possible to head off inflationary threats posed by high wage settlements – appears overtaken by events.
If nothing else, the ECB could argue that the heightened economic gloom and financial turmoil will help curb wage demands.
Amid signs of differing opinion among the members of the ECB’s 21-strong governing council, the central bank’s message had started to moderate even before yesterday’s Federal Reserve move, with several making clear that eurozone growth forecasts were rapidly becoming over-optimistic.
While the eurozone has not seen a general housing market collapse and has largely escaped direct macroeconomic consequences of the credit squeeze, the threat of a US recession is a serious concern. Tumbling equity prices, if sustained, would add to the risks to the real economy by threatening business confidence, for instance, even if the impact would not be as great as in the US or UK.
In judging the impact on inflation, the ECB will want to avoid drawing hasty conclusions. Some in Frankfurt might fear the Fed over-reacted on Tuesday. For now, eurozone economic fundamentals remain sound in the ECB’s view, especially with unemployment falling – unlike in the US. Jürgen Stark, ECB executive board member responsible for economic analysis, warned against “angst and panic” in an interview with Die Zeit, the German newspaper, released last night, adding that eurozone growth could remain in line with its long-term trend.
What is likely to be crucial is the extent of the US slowdown. If it can notch up positive growth, albeit it at a significantly slower pace, the idea the eurozone could grow this year at a rate approaching 2 per cent (after 2.6 per cent in 2007) would not seem outlandish. But a full-blown US recession, coupled with sustained financial market turmoil, would drag eurozone growth lower.
Ken Wattret of BNP Paribas said that in early 2001 the ECB had also taken a relatively optimistic stance on the eurozone’s ability to shake off problems from across the Atlantic. “In the end, the spillover from the recession in the US, problems in equity markets and the recognition that the eurozone economy was in trouble saw the ECB capitulate, despite uncomfortable inflation and a low euro exchange rate.”
In May 2001 the ECB cut its main interest rate by a quarter point, initiating an easing cycle not reversed until December 2005.
The New York Times reports that the Federal Reserve, confronted by deepening panic in global financial markets about a possible recession in the United States, struck back on Tuesday morning with the biggest one-day reduction of interest rates on record and at least temporarily stopped a vertigo-inducing plunge in stock prices.
The unexpected decision came after a rare, hastily called policy meeting by videoconference on Monday evening, and it reduced the Fed’s benchmark overnight lending rate by three-quarters of a percentage point, to 3.5 percent.
The Fed’s move was prompted in part by turmoil in global markets on Monday, a holiday in the United States. Shortly after lunch that day, the Fed chairman, Ben S. Bernanke, canceled a planned trip to New York and started organizing the impromptu meeting of the Fed officials who decide interest rate policy. The Treasury secretary, Henry M. Paulson Jr., watching the same market turmoil, was anxious enough that he called President Bush at the White House.
In a statement accompanying the Fed’s decision, which was announced about an hour before the stock market opened for trading, officials hinted that they might reduce rates yet again at their scheduled meeting next Tuesday and Wednesday.
The magnitude of the Fed’s rate cut helped reverse what began as a horrendous day in the stock markets. European and Asian stock prices had already plunged for the second consecutive day, and the Dow Jones industrial average fell 464 points — about 5 percent — as soon as markets opened in New York.
By the close of trading Tuesday, stock prices, after gyrating wildly, had clawed much of their way back. Shares of banks and insurers of mortgage-backed securities, which had been battered in recent days, were among the day’s biggest gainers. Asian markets seemed to calm Wednesday morning with most exchanges opening higher.
“Wall Street is incredibly jittery,”said Len Blum, a partner at Westwood Capital, an investment bank in New York.“They don’t know how to react to it. The last time they did a rate cut in between meetings was after Sept. 11, 2001.”
The Fed’s move came as Mr. Bush and Congressional leaders pledged to work together on a bipartisan measure to jolt the economy with about $145 billion in tax rebates, tax breaks for businesses and possibly additional payments to low-income people.
“I believe we can find common ground to get something done that’s big enough and effective enough,”Mr. Bush told reporters. Senator Harry Reid of Nevada, the Senate majority leader, said he hoped Congress could pass a bill before the recess for Washington’s Birthday on Feb. 18.
Still, it was a nerve-racking day on Wall Street, with the Dow ending down 128 points, or about 1 percent. Even after the rebound, the major market indexes are down about 10 percent so far in January and even further off their recent highs in October. The Nasdaq composite index, which mostly reflects technology stocks, is off 18.3 percent.
Economists said it remained far from clear that the United States would avoid a recession, either because the Fed and the Bush administration had moved too slowly or because the economy’s woes were too acute to solve quickly and painlessly.
“This is unique in the modern history of the Fed,” said Vincent Reinhart, a resident scholar at the American Enterprise Institute who was director of the Fed’s division of monetary affairs from 2001 to 2007.
Even so, it may not be enough to head off a downturn: changes in interest rates usually work with a lag time of at least six to nine months, and many economists say that a recession may already have begun.
Citigroup, citing the severely depressed housing market, the credit squeeze and high energy prices, predicted on Tuesday that the economy was about to start shrinking and would barely eke out any growth for all of 2008.
“Academic definitions aside, we’ll call that a recession,” wrote Steven Wieting, a Citigroup economist.
Fed officials stopped well short of such gloom and doom, but they made it clear they had been alarmed by both worsening data in the United States and the worldwide stock panic that began on Monday.
“Broader financial market conditions have continued to deteriorate,” the central bank said, noting that credit conditions have continued to tighten for many businesses and households, that the housing market continues to spiral downward and that job creation has slowed.
“Appreciable downside risks to growth remain,”the central bank said, its most forceful acknowledgment yet that the United States economy is on the brink of a recession as a result of the triple punch from the severe downturn in housing, the fallout from soured mortgages and the added blow of high oil prices.
The move represented a dramatic shift for Mr. Bernanke, who took over as Fed chairman two years ago. Mr. Bernanke, a former professor of economics at Princeton, had resisted calls for a big rescue effort by the Fed and favored a less personalized approach to monetary policy than his predecessor, Alan Greenspan.
But when Mr. Bernanke called policy makers together for an emergency meeting on Monday night, with regional Fed presidents participating over secure videoconference lines, he embarked on the boldest policy move in years.
This was only the fifth time that the Federal Reserve had reduced the overnight federal funds rate outside of its regularly scheduled policy meetings. It did so in October 1998, during Russia’s financial collapse, two more times in early 2001 as the economy was sliding into a recession and once more after the terrorist attacks on Sept. 11, 2001.
This was also the central bank’s biggest one-day cut in the federal funds rate, which is its target for the overnight rate at which banks lend their reserves to each other. Until Tuesday’s reduction of three-quarters of a percentage point, the biggest individual cuts were by half a point.
The only comparable rate cuts were in 1982 and 1984, when the central bank, which was following different procedures, reduced the overnight rate by more than one percentage point over the span of several weeks.
Fed officials clearly hoped that a bold and decisive act would calm investors and restore confidence in credit markets, where fears about soaring defaults on subprime mortgages have increasingly forced banks to curtail their lending in other areas.
But while investors did react with relief, the Fed’s move also seemed to validate the fears that the economy is closer to a recession than policy makers had thought.
On Wall Street, many if not most analysts had assumed that the central bank would reduce overnight rates by half a percentage point at the next policy meeting. But with the meeting only one week away, few investors expected the Fed to cut rates before then — a move that could easily be seen as panicky behavior.
The Fed move carries other risks. Reducing the interest rate could push up the inflation rate, even as it bolsters consumer spending.
In a speech this month, Mr. Bernanke strongly hinted that the Fed would reduce rates again at the policy meeting scheduled for next week. Mr. Bernanke had clearly not expected to move before the meeting.
But the Fed chairman became notably more worried by late last week. Most of the incoming economic data pointed toward a slowdown. On top of rising unemployment in December and depressed holiday sales at many major retailers, there were signs of a worsening credit squeeze, new declines in housing starts and worries about the companies that insure mortgage-backed securities.
Mr. Bernanke and other Fed officials contend they do not make decisions in order to calm financial markets. But analysts say they became alarmed about last week’s stock market plunge and Mr. Bernanke was even more alarmed by the huge drops Monday in foreign stock markets like Frankfurt, London and Hong Kong.
The drop in foreign stock prices undermined one of the last bright spots for the American economy — the prospect that a strong global economy, combined with a cheap American dollar, would spur enough export growth to offset a weakness at home.
The growing sense of crisis added urgency to efforts by Mr. Bush and Congressional leaders to bury their political animosities and agree on a short-term fiscal- stimulus package.
A spokesman for Mr. Paulson said that he had been busy reaching out to Congressional leaders all last week and that the market declines of the last few days had not by themselves forced him to quicken the pace.
Mr. Bush and Congressional leaders have both talked about a package that would inject about $150 billion in additional money into the economy. That would equal about 1 percent of the nation’s economic output, which economists and Fed officials said could make a difference if the money gets into people’s hands quickly enough.
But even if Congress passes such a measure by mid-February, which would require Republicans and Democrats to suppress their animosities and their contrasting economic approaches, the earliest that tax rebates would actually reach people would probably be this summer. At that point, it would help soften the blow but a recession might have already been under way for months.
Ultimately, it is the Federal Reserve that has the most power to avert or soften a recession. But its power is finite, and its primary tool — lower interest rates — takes time to work.
“Monetary policy works with a lag,” said Mr. Reinhart, the former top Fed official. “There’s nothing the Fed can do to prevent a recession if it is coming in the first half of this year.”
The NYT also reports that from buoyant optimism just two years ago, the mood among foreign investors in Japan has swung to grim pessimism.
An intense sense of disappointment that the country has not kept promises to open itself to the global economy, combined with a global retrenchment of investment portfolios after America’s housing-loan crisis, has proved particularly destructive to Tokyo’s stock markets.
Even in the current global rout of world bourses, the size of the declines on Tokyo’s stock markets stands out. Japan’s benchmark Nikkei 225 stock index has lost a third of its value since mid-July, and the Tokyo Stock Exchange has lost $1.3 trillion in market value — equivalent to the entire economy of Canada. By comparison, major indexes in New York, London and Frankfurt are down 13 to 16 percent since mid-July.
On Tuesday, the Nikkei plunged 5.7 percent, to 12,573.05, its biggest daily drop since the session after the Sept. 11, 2001, terrorist attacks.
“People are giving up on Japan,” said Patrick Mohr, director for equity research at Nikko Citigroup in Tokyo.“In this environment, investors want to see results. There is a perception that none of Japan’s reform promises have come through.”
Mr. Mohr and other stock analysts say one reason for the size of the sell-off here is Tokyo’s heavy dependence on foreign investors. Big local institutions favor safer investments like bonds, while individuals keep more of their savings in the bank, or in overseas assets like emerging market funds.
In recent years, foreigners have typically accounted for more than 60 percent of trading on the first section of the Tokyo Stock Exchange, the exchange says. Last summer, when global investors started pulling back, the scarcity of other buyers amplified the market declines.
Formidable Japanese manufacturers like Toyota, Honda and Canon — the shares most favored by foreigners — are all down by more than 36 percent since mid-July.
The battering of Japanese stocks in the subprime gale is paradoxical, because Japan, unlike other major global economies, had relatively small exposure to the American housing mess. Japanese banks have reported far smaller losses related to subprime loans than their counterparts in America and Europe, and Japan’s housing market faces no similar wave of foreclosures, economists say.
Indeed, a small number of investors say the sell-off, and the pessimism that has driven it, may have gone too far. Some investors are beginning to talk of this as a buying opportunity. They point out that Japanese companies, while less profitable than their American or European counterparts, are often cash-rich, and their strong technology makes them globally competitive.
They also say that companies are improving returns for shareholders, though at a slower pace than many foreign investors had hoped. Dividends are rising steadily, and are expected to reach record amounts this year.
“There is an unappreciated sea change here that is hard to see in the current crisis of confidence,” said Scott Callon, chief executive of Ichigo Asset Management, a Tokyo-based investment fund.
Still, the near-term prospects for Japan’s economy appear relatively poor. Japanese consumers, after nearly two decades of austerity, are still reluctant to spend, leaving the country dependent on exports for the bulk of its growth.
Last month, the increasing likelihood of a downturn in the United States forced the government to cut its growth forecast for the current fiscal year, ending March 31, to 1.3 percent, from 2.1 percent. At the same time, the Bank of Japan, the central bank, issued its bleakest assessment of the economy in three years, and on Tuesday it said that growth was slowing more than expected.
Foreign investors also cite adverse reactions to overseas funds that seek to increase the return to shareholders. John Ho, the director in Asia for the Children’s Investment Fund, a British activist fund, bought a $600 million stake in Electric Power Development two years ago and has requested board seats and higher dividends.
He said he was fighting not just the company but also the trade ministry, which can limit foreign ownership in power companies for national security reasons. The vice trade minister, Takao Kitabata, said that his ministry would “take needed measures” if the Children’s Fund tried to influence strategic decisions at the company, which wants to use earnings to pay down debt rather than raise dividends.
Despite the setbacks, Mr. Ho said he believed that Japan was making progress toward heeding the interests of shareholders, albeit at a frustratingly slow pace. “Things are changing,” Mr. Ho said. “It just seems sometimes that every step forward is accompanied by two steps back.”
