Tokyo Market: Strong yen threatens shares

JAPANESE stocks may slide if the yen continues its climb against the dollar, wreaking havoc on earnings at Canon and at other exporters that depend ever more on overseas sales as Japan's economy wallows in its worst recession in five decades.

The nation's economy is on course to shrink for a second straight year, and exporters - Japan's sole engine of growth - may see earnings stymied if the yen keeps strengthening against the dollar. The dollar slumped nearly 4 per cent against the yen this week.

"If the yen is strong, the Nikkei can't go up," said Campbell Gunn at Meiji Dresdner Asset Management. "Foreigners traditionally buy export names, and Sony and Canon may have problems because the underlying demand is all outside Japan."

The benchmark Nikkei 225 stock average fell 2.9 per cent to 14,639.97. It could fall to 14,200 said Celia Farnon at Nomura Securities.

A strong yen could wipe out exporters' windfall profits. Moreover, if Wall Street continues to weaken, companies that depend on robust US growth, or that are enmeshed in a complex network of supplier relationships, may fall further. "All eyes are on the yen and all eyes are on New York," said Nomura's Ms Farnon. "It could be a trying week for the electricals."

Nor will any shortfall likely be made up at home. The nation's GDP shrank a worse-than-expected 0.7 per cent in the quarter ending September against the previous quarter - 2.6 per cent on an annualised basis.

Still, PC-related shares such as Nidec and Alps Electric could hold up even in a bear market, as their distinctive niches will likely bring in strong profits. And the market may be kept from sinking by government- linked pension funds to shore it up ahead of the states's sale of its fourth tranche of Nippon Telegraph and Telephone this week. "I think I can take a turn on it," said Scott McGlashan, director at Perpetual. "I don't think it's a long-term investment, but if the pricing is right, I'll probably be a taker."

Japanese government bonds are likely to be little changed as global deflationary pressure may offset concern that a glut of bonds will flood the market.

"It looks like a supply concern and a flight to quality are having a tug-of -war," said Michiya Seki, a trader at New Japan Securities. Last week, the benchmark government bond rose and its yield fell 3.5 basis points to 1.040 per cent.