OVERSEAS investors in the Tokyo stock market may be wondering if the Japanese know something they do not. As foreigners buy shares they believe to be underpriced, the Japanese are waiting on the sidelines or selling heavily.
The two perspectives have little relation to company balance sheets. The Japanese economy remains stuck, unable to shake off its worst recession in 20 years. What has been moving the market over the past three months is not business performance but the expectation of a government stimulus package of tax cuts and public works projects.
But the implementation of the stimulus package rides on the fortunes of political reform bills, which the government is trying to steer through Parliament. The reform package will expire if not enacted by Jan. 29, when the current parliamentary session ends. When those bills were rejected Jan. 21 the economic stimulus was again delayed. That drove the key Nikkei index down nearly 5 percent Jan. 24. However, trading recovered by 295.12 points on the Nikkei Stock Average to 18,648.36, or 1.6 percent, on Jan. 25.
What saved the market was buying from overseas investors. They are less interested in short-term political infighting than a broader view of the Japanese market in relation to Asia. Other Far East stock markets from Hong Kong to Kuala Lumpur have surged in the past year, some of their indices doubling in value. That makes Japanese shares look increasingly cheap.
``Basically, the Japanese market is undersold,'' says Robert Feldman of Salomon Brothers in Tokyo. ``If you look at the Japanese market performance relative to other markets it was quite bad last year. It looks like this is the only market that hasn't gone up yet.''
Mr. Feldman adds that Southeast Asian markets have not been performing well over the last two weeks. ``That's encouraged a lot of people to take money out of there and put it here.''
Since the beginning of the year, a net $5.5 billion has poured into Japanese stocks from overseas investors. According to one analyst, that figure could reach more than $9 billion by the end of January. That is more than two-thirds the net foreign investor spending for the whole of 1993.
Japanese investors, on the other hand, are concerned about domestic political problems. The failure of the reform bills last week not only means a delay of the economic stimulus package, but also of the government's annual budget. The procedure for passing that is already a month overdue. In addition, there is the possibility of government paralysis at a time of increasing US pressure over trade.
BUT while the political situation looks increasingly fragile, with the possibility of a snap general election if agreement over political reform is not reached, Japanese investors are not entirely pessimistic. Analysts say they are selling shares partly because of the need to balance their books by the close of the financial year on March 31. And the Jan. 24 sell-off could have been worse - it did not take the market down to anywhere near the levels of early December, when passage of the reform bill seemed more hopeful. On Jan. 25, foreign buying mixed with Japanese indifference sent the market back up again.
Feldman believes the confidence of overseas investors is not misplaced. ``If you look at the yield gap measured on a firm by firm basis, there are a lot of bargains in this market; particularly if the Japanese yen has peaked out and might even weaken a little bit. But it's difficult to put an average figure on P/E [share price over earnings] ratios because they differ so much on a company by company basis.''
Some analysts say that the P/E ratios of Japanese electronic companies compare well to their US counterparts. Feldman says some of these companies - which rely heavily on exports - should do well as the yen weakens and the US economy advances. Even buying on yen-dominated shares does not deter investors, Feldman says, because any weakening of the yen will be more than compensated for by an increase in the price of export-related shares.
With Prime Minister Morihiro Hosokawa meeting President Clinton in Washington next month, and the possibility of an election hanging over their heads, investors will have to stay on their toes over the next weeks, analysts say.