Abenomics Rout Makes Stocks Cheapest Versus Bonds: Japan Credit
Confidence in Prime Minister Shinzo Abe’s stimulus policies is faltering after foreign investors sold $24.2 billion of Japanese shares this year, leaving them the cheapest relative to bonds in 18 months.
The earnings yield for members of the Topix index, or estimated net income divided by the average share price, rose to 7.97 percent on April 14 as the benchmark slumped 13 percent this year, data compiled by Bloomberg show. That’s a 7.37 percentage point premium over 10-year Japanese government bond yields, the most since October 2012. The equivalent spread in the U.S. was 3.75 percentage points.
Abe has yet to take new pro-growth steps even as the economy faces the sharpest quarterly contraction in three years after a sales-tax increase. Bank of Japan Governor Haruhiko Kuroda refrained from adding to stimulus on April 8, sending the Topix to its biggest weekly slide in 10 months. Japan’s sovereign debt returned 1 percent this year, bringing yields to levels some fund managers say are unattractive.
“The BOJ’s bond buying has driven yields so low that there is limited scope for further declines even if stocks retreat,” said Masaru Hamasaki, a senior strategist at Tokyo-based Sumitomo Mitsui Asset Management Co., which oversees the equivalent of $132 billion. “There are concerns that the sales-tax increase will hurt growth and corporate profits.”
The central bank’s monetary stimulus, the so-called first arrow of Abe’s economic strategy, helped drive a world-beating 51 percent jump in the Topix last year and an 18 percent plunge in the yen versus the dollar, the most since 1979.
Foreign fund managers piled into Japanese equities in 2013, buying a net 15.1 trillion yen ($148 billion), the most on record, as Abe urged traders on the New York Stock Exchange to “buy my Abenomics” in September.
The Topix rose 0.3 percent yesterday, halting a seven-day losing streak which brought the gauge to the lowest in seven months on April 14. The benchmark 10-year yield was at 0.6 percent, the lowest globally, as the BOJ continues to buy about 7 trillion yen of sovereign bonds a month.
“Stocks are undervalued relative to bonds as corporate earnings are good,” said Satoshi Okumoto, the chief executive officer in Tokyo at Fukoku Capital Management Inc., which oversees the equivalent of $18 billion. “Equity investment is better in the medium to long term.”
Four of the 36 economists surveyed by Bloomberg expect the BOJ to add to easing as soon as its next meeting on April 30 when policy makers release updated forecasts on inflation and economic growth.
Governor Kuroda said he told Abe that the central bank won’t hesitate to adjust monetary policy if needed, after the pair met for lunch in Tokyo yesterday. Abe didn’t make any special policy requests, Kuroda told reporters after the meeting.
Gross domestic product will probably shrink an annualized 3.35 percent this quarter, the sharpest drop since the first three months of 2011, according to a Bloomberg poll of economists. The government raised the consumption levy to 8 percent from 5 percent this month and has yet to decide on the second increase to 10 percent in 2015.
Increases in consumer prices excluding fresh food have stalled at 1.3 percent since December, falling short of BOJ’s 2 percent target. Wages excluding overtime and bonuses declined in February for a 21st straight month, down 0.3 percent from a year earlier.
Citigroup Inc.’s Economic Surprise Index for Japan, which shows whether data have beat or lagged behind economists’ forecasts, dropped to the lowest since October 2012.
“Large-scale purchases of JGBs by the BOJ could very well continue until 2018,” Toru Yamamoto, the chief strategist at Daiwa Securities Co., told reporters in Tokyo yesterday. “Bond investors won’t move unless we see companies boost capital spending domestically and that growth, consumer prices and wages increase.”