The worst is over for Japan, but the recovery depends on the country overcoming a number ofinherent problems, according to the latest investment report by Royal Bank of Canada analysts.

"The most essential is a firm commitment by both the Japanese government and corporations to continue with their restructuring plans, however difficult this may prove to be in the shortterm,'' they state in the bank's third quarter 1999 International Investment Outlook report.

The analysts recommend an asset mix of 57 percent equities, 40 percent bonds and three percent cash. The recommendations are as of June 30.

In a US-dollar equities portfolio the bank recommends 46 percent holdings in the US, 22 percent in European Monetary Union countries, 12 percent UK, 10 percent Japan, six percent non-EMU countries, two percent Canada, one percent in Australia & New Zealand, and one percent in Asia. The bank recommends no holdings in Latin America.

In a bond portfolio, the analysts recommend holdings of 43 percent in the US, 29 percent in the EMU, 10 percent Japan, nine percent UK, six percent non- EMU, and three percent Canada.The bank recommends no hold ings in Australia and New Zealand.

The most significant change in the global outlook is in Japan and the rest of Asia, where declines seem to be bottoming out.

Growth in the US markets is expected to continue but at a slower rate, accord ing to the analysts.They predict growth in the range of 3.2 percent this year and three percent in 2000. That growth will take a different shape for investors.

"Until recently a narrow band of large US companies led the market higher,''they state. "Now, with economies in Latin America and Asia showing signs of recovery, investors have broadened their scope and begun to look for value in smaller-capitalisation and mid-cap stocks.'' A severe downturn is unlikely with earnings growth for Standard & Poor's 500 Index expected at eight percent this year and ten percent in 2000.

"Growth in the US economy will slow as tighter monetary policy kicks in, employment growth slows, and oil prices rise,'' they predict. "The combination of these factors will dampen consumer spending, which has played a large role in driving the stock market higher.'' In the EMU countries, the analysts remain bullish on the market as a whole.

GDP is expected to accelerate to 3.5 percent from 1.3 percent in the final quarter of the year.

The analysts are also not put off by the euro's low level against the US dollar. The drop is from a period of "unnatural strength'' which resulted from anticipation of the euro's inception.

"The euro currently represents good value relative to the US dollar,'' they state. "This value, combined with the low-interest-rate environment, makes it attractive to those seeking capital.'' In non-EMU countries, the UK appears to be overvalued to the analysts. Growth is expected to lag while inflation is expected to increase.

Meanwhile in Japan the outlook for growth remains murky as the economy bottoms out. Japan's GDP grew by 1.9 percent in the first quarter of 1999, the first expansion since the summer of 1997.

"We believe this is a solid indication that the worst is over,'' they stated.

"However, the speed and height of the recover, as well as the direction of share prices, depend on a number of important factors.'' Japan's economy has been invigorated by a series of government fiscal packages, and a tougher stance with banks severely weakened by bad debt.

"We expect it will take at least two years for the economy to return to full health, and until the next fiscal year for the benefits of corporate restructuring to show up in profits,'' the analysts state. "But a sustained recovery is a good bet if government and corporations remain steadfast in their resolve.'' The Nikkei-Index performance over the first five months of the year has been an indication of the returning confidence in Japan. The index rose by 18 percent in the period, but still re mains more than 50 percent below its peak in 1989.

Some of the best candidates for gains for aggressive investors are in the paper, oil, chemical and economically sensitive sectors of the market, they state. For conservative portfolios, blue-chip companies operating in the international markets and telecom munications firms are the best candidates for investments.

Retailing, construction and machinery sector stocks are unappealing because of a lack of capital spending.

Royal Bank operates on the Island through Royal Trust (Bermuda) Ltd.

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