Oct. 23 (Bloomberg) -- Share sales by Japanese banks will hold down the stock market, according to Citigroup Inc.’s Tsutomu Fujita, the top-ranked strategist in Institutional Investor’s 2009 survey.

The Topix index has lagged behind the MSCI World Index this year as financial companies such as Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. raised 1.8 trillion yen ($20 billion) selling shares since December to boost reserves. Issuing shares reduces the stake of existing holders and dilutes earnings.

“There is a substantial possibility the mega banks will raise capital on a large scale in the near future,” Fujita, chief strategist for Japan equities at Citigroup, said in a Tokyo seminar yesterday. “This situation will continue,” and that will weigh on Japan’s stock market.

The panel that oversees the Basel Committee on Banking Supervision agreed on Sept. 6 that lenders should raise the quality of their Tier 1 capital, which measures their ability to absorb sudden losses, the group said. The source of the reserves should be common share sales and retained earnings, it said.

Mitsubishi UFJ had a core Tier 1 capital ratio of 6.8 percent as of the end of June, according to UBS AG’s calculations. While that was the highest among the three Japanese banks, it was below the 10.4 percent at Zurich-based Credit Suisse Group AG and 8.8 percent at London-based HSBC Holdings Plc, UBS said in a report last month.

Emission Target

A gauge of Japanese bank shares has lost 17 percent in 2009, while the Topix has gained 5.1 percent. The MSCI World Index has climbed 26 percent in that time.

Fujita predicted on May 26 that record stimulus measures would fuel gains in stocks. The Topix climbed 10 percent in the next three months to its highest in more than a year on Aug. 26.

Plans to toughen rules on global warming will benefit Japanese companies from Toyota Motor Corp. and Mitsubishi Heavy Industries Ltd. to Toshiba Corp. that use environmentally friendly technology, Fujita said.

Prime Minister Yukio Hatoyama pledged on Sept. 7 to reduce Japan’s greenhouse-gas emissions 25 percent by 2020 from 1990 levels, a more ambitious target than those of previous administrations. His proposal is contingent on all major emitters agreeing to a new global climate-protection treaty scheduled for negotiation in Copenhagen in December.

Clean Technology

Citi’s Fujita said the administration’s higher goal is achievable. Mitsubishi Heavy is Japan’s largest heavy-machinery maker, while Toshiba owns most of Westinghouse Electric Co., a U.S.-based maker of nuclear power plants. Toyota and smaller rival Honda Motor Co. produce gasoline-electric hybrid cars.

Toshiba said in August it expected to receive orders for 39 nuclear plants globally by 2015. Toyota, the world’s biggest automaker, expects hybrid vehicles to account for 30 percent of its car sales by 2020, Executive Vice President Takeshi Uchiyamada said Oct. 21.

Panasonic Electric Works Co. and Sekisui House Ltd. may also benefit as their technologies contribute to reduction in greenhouse-gas emissions from homes, Fujita said in a separate seminar today.

To contact the reporter for this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net.

Last Updated: October 23, 2009 02:07 EDT