Signs corporate Japan can break out of its current crisis remain absent Japanese companies have a low ROE compared to their US and European counterparts. Therefore, although Japanese companies responded to the financial crisis that originated in the US by issuing stocks and other measures, the only way for corporate Japan to break out of the crisis it faces is to create a corporate structure that generates wider profit margins. Unfortunately, the profit recovery in FY2009 for corporate Japan lagged that at US and European companies and signs that corporate Japan can break out of its current crisis are absent.

The weakness (crisis) hampering Japanese companies is low profitability Japanese companies go into the red easily due to their narrow margins. This appears less a problem of high costs than of weak pricing power or insufficient attention to pricing strategy. Japanese companies can change their corporate structure and exit the current crisis, but it will require a more thorough understanding of shareholder governance, including capital costs.

Future of corporate Japan
T here has been a gradual but ongoing evolution, including a reduction in both cross shareholdings and dual parent/subsidiary listings along with better protection of minority shareholders through laws and tighter regulation. However, the speed of change has not kept pace with the country's shrinking and graying population, or globalization. If there is such a thing as Japanese-style capitalism, it cannot mean simply maintaining the status quo. Japanese companies must analyze Japan's strengths and capitalize on them amidst the nation's shrinking and graying population and globalization.

Eoin Treacy's view We have long observed that the strength of the Yen was a headwind for Japan's dominant export sector, not least because of tight margins and the highly competitive nature of the global manufacturing sector. The Nikkei-225 fell through 9000 yesterday and remains in a relatively consistent 5-month downtrend, defined by the progression of lower rally highs. While the market is somewhat oversold in the short-term a sustained move above 9500 is now required to question the consistency of the decline and to suggest demand is regaining the upper hand.

The Topix Banks Index has lost downward momentum but continues to drift lower. A sustained move above 130 would be required to break the progression of lower highs and signal renewed investor interest in what remains a "bombed-out" sector.

The Topix 2nd Section Index of smaller cap companies has been building a base since finding support in the region of 1800 from October 2008. Prices have been declining from the upper side since late April and while Monday's upside key day reversal was the largest one-day advance since at least May, it has not yet received follow through and the progression of lower highs remains in place. Upward dynamics sustained for more than a day or two are required to indicate demand is returning to dominance.