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Stocks Beat Bonds as Equity Sales Increase to 35% of Total: Japan Credit

Japanese companies seeking to shore up capital ratios are selling the most equity compared with bonds since 2006, as investors turn away from corporate debt offering the world’s lowest yields.

Oil explorer Inpex Corp. and Dai-ichi Life Insurance Co. led companies that raised 5.12 trillion yen ($62 billion) in equity last year, or 35 percent of total stock and bond sales, up from 33 percent in 2009 and the most since the ratio was 50 percent in 2006, data compiled by Bloomberg show. Bond offerings fell 16 percent to 9.6 trillion yen from 2009’s record, with the average size shrinking to 21 billion yen from 30 billion yen.

Inpex raised 541.1 billion yen in August, Japan’s biggest offering by a non-financial company in 2010, using its first share sale since going public in 2004 to help fund the $20 billion purchase of an Australian gas field. U.S. companies trimmed stock sales to 13 percent of funding last year from 15 percent.

“We did a capital increase because we need to maintain a good financial balance,” Masahiro Murayama, managing executive officer in Inpex’s finance and accounting division, said last week in an interview. “We increased our stock to keep our equity-capital ratio above 50 percent.”

Dividend yields on the Topix climbed to 1.9 percent last month, 0.9 percentage point more than 10-year government bond yields, compared with a 0.45 point spread at the end of 2009.

Topix May Rise

Investor demand for stocks comes as analysts forecast equities will outperform bonds this year. Credit Suisse Group AG predicts the Topix index of 1,662 equities will rise about 34 percent from 898.80 at the end of 2010, recouping losses suffered after Lehman Brothers Holdings Inc.’s 2008 collapse. Nomura Holdings Inc., Japan’s biggest brokerage, and Morgan Stanley expect a 22 percent advance while Goldman Sachs Group Inc., Citigroup Inc. and Deutsche Bank AG forecast 11 percent.

The 10-year bond yield for Japan will advance to 1.24 percent by year-end from 1.19 percent as its price falls, according to the average forecast in a Bloomberg survey of 15 analysts, with the latest estimates given the most weight. An investor who bought the bonds today would earn 0.74 percent by Dec. 31 if the forecast proves correct, Bloomberg data show.

The financial crisis following the collapse of Lehman prompted companies to strengthen their balance sheets by reducing indebtedness. They’ve further sought to boost cash in case the global economic recovery falters.

‘Just So Scared’

“Non-financial companies are just so scared that they’re piling up more and more cash,” said Nicholas Smith, director of equity research in Tokyo at MF Global FXA Securities Ltd. “They don’t trust the economic rebound.”

Equity sales helped non-financial companies in the Topix reduce net debt to 33.6 percent of shareholders equity on average as of Sept. 30 from 41.3 percent a year earlier, according to data compiled by Bloomberg. That’s the lowest level since the quarter ended Sept. 30, 2008.

“As an investor, I prefer equities to company bonds,” said Kenji Sekiguchi, general manager covering equity and debt in the strategic investment and research division of Mitsubishi UFJ Asset Management Co., which oversees $75 billion. “Equities are better than corporate bonds from a yield point of view.”

Average corporate bond yields fell to 0.73 percent on Dec. 31 from 1 percent at the end of 2009, declining for a second year, according to Bank of America Merrill Lynch indexes. U.S. company debt rates declined to 4.09 percent from 4.89 percent.

Twice as Fast

Inpex shares have gained 16 percent since it sold stock Aug. 3 at 417,100 yen apiece, almost twice as fast as the Topix’s 8.8 percent advance in the same period.

Tokyo Electric Power Co., the country’s largest electricity generator, delivered a 7.5 percent return for investors who bought its 5 billion yen offering on Oct. 20. The company sold shares for the first time since its 1951 initial public offering, according to data compiled by Bloomberg. The utility may sell dollar-denominated bonds for the first time since 1997, Chief Financial Officer Masaru Takei said last month.

The Topix index rose 0.1 percent yesterday after jumping 3.1 percent last week, the largest advance since the five days ended July 9. Japan’s 1.2 percent note maturing in December 2020 has dropped since Dec. 30, driving up the yield by eight basis points to 1.19 percent.

Up 15 Percent

The stocks gauge climbed 15 percent since Nov. 1 as the yen weakened against the dollar from a 15-year high, boosting the outlook for export earnings at Japanese companies. The Topix climbed 8.4 percent in the final three months of last year, the biggest quarterly advance since June 2009. The yen depreciated 2.4 percent to 83.09 yen so far this year.

Corporate bonds lost 0.24 percent in the fourth quarter of 2010, their first decline since the three months ended March 31, 2009, according to Bank of America Merrill Lynch indexes. Company debt returned an average annual gain of 1.8 percent in the past five years, compared with a loss of 8 percent for the Topix, including dividend payouts, as Japan’s persistent deflation shrank profits and enhanced the fixed payouts on debt.

Deflation, an extended decline in prices, boosts demand for the fixed payments that bonds offer. Consumer prices excluding fresh food fell in November for a 21st-consecutive month, the statistics bureau said Dec. 28.

The difference between yields on eight-year Japanese government notes and inflation-linked debt, a gauge of investor expectations for price changes, was at minus 0.36 percent. It reached minus 0.29 percent last month, showing the smallest deflation bets in more than two years. The comparable rate is 2.22 percent in the U.S.

Bank of Japan

Stocks also advanced after the Bank of Japan last month bought 14.2 billion yen in exchange-traded funds, the first purchases under plans announced Oct. 5 to boost prices of stocks and real-estate investment trusts.

BOJ Governor Masaaki Shirakawa has said increasing the asset-purchase fund is a “probable option” should the economic outlook worsen. At its Oct. 5 meeting, the central bank cut its key overnight lending rate to “virtually” zero, and pledged to keep it there until it can forecast stable prices.

The Markit iTraxx Japan index of default swaps on 50 investment-grade borrowers, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, declined three basis points since Sept. 30 to 103.7, according to CMA prices in New York. The Markit CDX North America Investment Grade Index of 125 investment-grade companies fell to 89.2 from 106.7 in the same period.

The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to meet its obligations. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

To contact the reporters on this story: Nicolas Johnson in Tokyo at nicojohnson@bloomberg.net; Satoshi Kawano in Tokyo at skawano1@bloomberg.net.

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net.

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