Japan ‘Terrible Ideology’ Hurts Stocks, Dresdner Says

By Patrick Rial

Feb. 4 (Bloomberg) -- Japan, which has proposed two new policies in as many weeks to stimulate its economy, needs to do more if it’s to rescue its floundering stock market from a deepening recession, according to Dresdner Kleinwort (Japan) Ltd.

The government has avoided aggressive measures on misplaced worries about the national debt, said Dresdner’s Peter Tasker, the No. 1 strategist in Japan from 1992-1996 in a Nikkei Inc. poll. The economy needs quantitative easing, where the central bank prints money to promote price stability, and fiscal policies that stimulate demand and restore confidence, he said.

“There’s a terrible ideology in Japan about government debt and how bad it is, which is utterly meaningless,” Tasker said. The government “can definitely contribute with more aggressive fiscal and monetary policy.”

Last week, the government proposed allowing the state-owned Development Bank of Japan to buy corporate shares, providing capital to companies squeezed out of debt markets. The Bank of Japan yesterday pledged to spend up to 1 trillion yen ($11 billion) buying stock from banks.

The DBJ share purchase plan is a counterproductive bailout, while the central bank’s program isn’t sufficient, said Tasker, who is also a founding partner of Arcus Investments, a London- based hedge fund.

The benchmark Nikkei 225 Stock Average lost a record 42 percent in 2008, and another 9.3 percent so far this year. Companies posting third-quarter results have seen net income fall 53 percent in the first nine months of the fiscal year, according to data compiled by Shinko Research Institute.

‘Fair Competition’

Japanese companies’ woes are being compounded as a global wave of bailouts, including the U.S. rescue of its auto industry, causes oversupply and reduces profitability, Tasker said.

“Japan depends on a world of globalization in which there is some degree of fair competition,” Tasker said. “But if you’ve got all the bailouts, it’s deflationary, because you’re keeping guys producing who shouldn’t be producing.”

Japan’s national debt is equal to 170 percent of its annual gross domestic product, the highest among developed nations, according to data compiled by Bloomberg. That compares with 56 percent for the United States and 65 percent for Germany.

Japan’s debt is largely held by domestic investors which indicates that the country doesn’t face much risk of paying higher interest rates because it doesn’t rely on attracting capital from overseas, said Tasker.

High-Yield Stocks

Additionally, the Bank of Japan has proved reluctant to use quantitative easing again, he said, even as the U.S. Federal Reserve has started on its own program of increasing the money supply by purchasing bonds with newly minted money.

Tasker recommends investors search out companies with high dividend yields that will become more attractive as central bank interest-rate cuts drive bond yields lower and force investors to search out stocks that offer income.

“The BOJ doesn’t really know what they’re doing, because there’s no downside” to more aggressive monetary easing, the strategist said. Stocks with high dividend yields “will be very attractive as the whole world moves toward zero interest rates.”

Tasker joined Dresdner in 1983, working as an equity strategist in Tokyo through 1998. He became a consultant strategist at the firm in November.

To contact the reporter for this story: Patrick Rial in Tokyo at prial@bloomberg.net.