Japanese prospects looking brighter

USA

Uncertainties over the strength and pace of the U.S. economic recovery resulted in dissipating upward momentum in the U.S. equity market.

April leading economic indicators dropped by 0.4%, owing to lower stock prices, increase in jobless claims, and a dip in consumer confidence. Investment strategists recommend investors switch from computer-related shares to utilities, consumer and defense stocks for better earnings growth.

Recent warnings of another possible round of terrorist attacks and the high oil price are major concerns to the market. U.S. crude oil inventory has dropped by a greater-than-expected 2.3%, owing to low production from Iraq and other OPEC members.
Looking forward, the U.S. Treasury Department expects long term growth potential of the U.S. economy to be 3% to 3.5%, with the help of strong productivity growth.

Inflation is not an 'imminent problem', as excess capacity, high unemployment rate and rising productivity are factors working to keep price increases under control.

Europe

European stocks, especially those earnings are dependent on the U.S. market, fell on concerns that company profit might not rebound as fast as anticipated. The eurozone headline inflation rate was revised up to 2.4%, well above the ECB's upper limit of 2.0%.

Market worries that the ECB might raise rates at the June 6th policy meeting. We view that too early a rate hike by the ECB may stifle the then recovering economy.

In Germany, the economy grew by only 0.1% in 1Q2002 from the 4Q, and shrank by 0.3%y/y. Ahead of the September election, rising unemployment and metal workers' labour actions for higher pay do not bode well for Chancellor Gerhard Schroeder's popularity in opinion polls.

In the U.K., retail price excluding mortgage interest rose by only 0.7% m/m in April, with the increase being attributed to higher travelling expenses, property maintenance and insurance fees. The figure suggested that the U.K. economy is rebounding with inflation staying at comfortable level. With the U.K. annual inflation rate running below the Bank of England's target at 2.5%, Bank of England is expected to keep interest rate unchanged until August.

Looking forward, the European Central Bank is confident that the eurozone economy is on a recovery track. The ECB estimates that the region could grow by 2.0 to 2.5% in 2002.

Japan

In Japan, growing number of companies are deriving an increasing share of their sales from export markets to take advantage of the global economic recovery.

There are signs that Japan is emerging out from the recession. Industrial production (up 0.5%) has increased for two consecutive months and exports have been on the rise for three months. April's employment report showed a month-on-month rise for the first time in nine months.

Investment analysts have recently started to recommend increase weightings in Japan in anticipation for a more substantial earnings improvement in the future after all these restructurings and a rebounding economy.

Share buy back activities are expected to give support to the market. In FY01, based on companies that have announced share buy back intentions, the value is estimated to double to Yen 2.40 trillion.

For a broader recovery, we would need a tax cut, which is expected to come before the end of June. Analysts estimate that a net tax cut of around Yen 2 - 3 trillion is needed to generate a rise in demand which is important to ensure the present recovery enduring.

The all-industry index rose by 0.60% in 1Q2002, the first increase in 12 months, suggesting that spending on services has started to improve. Consumer Confidence Index improved in March, the first time in three-quarters. The Cabinet Office Economy Watcher Survey's index of household spending has also turned upwards.