Japan Individuals’ Trillions to Rescue Rally, Sawakami Says

Japanese stocks will rally after a correction as more retail investors transfer some of almost $9 trillion of bank savings into equities, according to the nation’s largest independent mutual fund.

“There’s no doubt that money previously kept in deposit accounts is starting to move,” said Atsuto Sawakami, chairman of the 297 billion yen ($3 billion) Sawakami Fund. “The shift from savings to stock-market investment will steadily proceed and become more widespread.”

The Topix index has lost about 15 percent from an almost five-year high on May 22, after surging 77 percent in five months on Prime Minister Shinzo Abe’s efforts to revive the world’s third-largest economy. In the week to May 24, individuals accounted for 32 percent of all trading in Japanese shares, double the share at the start of November, according to Tokyo Stock Exchange Data.

A record 55 percent of individuals’ financial assets, or 854 trillion yen of a total 1.5 quadrillion yen, was held in deposit accounts at the end of December, according to Bank of Japan statistics. Only 6.8 percent, or 106 trillion yen, was in stocks. In the U.S., 15 percent of household assets are in savings accounts with 33 percent in stocks. In Europe the figure is 36 percent in deposits and 14 percent in shares.

Abe will publish his government’s economic growth strategy next week, part of his revival plan following fiscal and monetary stimulus. While the first two stages were initially greeted with enthusiasm by investors, stocks have entered a correction from the biggest rally in a quarter century and the yen has risen against the dollar after touching a 4 1/2-year low.

‘Bamboo Joints’

“The recent stabilization of stock prices is a very good thing for the future,” Sawakami said in an interview on May 29. “By repeating this process over and over, the rising market will find its legs. It’s like how bamboo joints get stronger by adding layer upon layer. We’re now at the stage of creating the joints.”

His Sawakami Fund has outperformed the Topix index in 10 of the past 13 years, according to Bloomberg data.

While the participation of retail investors has increased, they have been net sellers in all but seven weeks of the rally, according to Japan Exchange Group Inc. data.

Yet this doesn’t mean individuals are leaving the market, Sawakami said. Retail investors have been trading “against the trend,” buying when the market falls and selling to take profits when it rises, he said.

Net Buyers?

In the week to May 24, when the Topix had its biggest drop since August 2011, individuals bought a net 408 billion yen worth of shares, the most since July 2009, the data show. Net sales jumped to a record in the week to April 12, when the Topix surged by the most since September 2008.

“If the huge amount of money sitting in deposit accounts starts to flow into the stock market in earnest, individuals will probably shift to being net buyers even when the market’s rising, but this will probably take another two or three years,” Sawakami said.

Japan’s five largest online brokerages posted record trading in May as equity volume surged and individuals returned to Japan’s share market. Matsui Securities Co., which gets 65 percent of its revenue from commissions, said the value of shares traded though client accounts rose to a record 5.86 trillion yen. Turnover also reached records at Monex Group Inc., Rakuten Securities Inc., Kabu.Com Securities Co. and SBI Securities Co.

Historic Disappointment

Japanese shares have failed to maintain strong rallies in the past. Every gain of more than 40 percent since stocks peaked in 1989 has ended with the Topix index finding a new low. The gauge closed at its lowest since 1983 a year ago this week.

“Most individuals have never experienced rising stock markets, so they just don’t know the real pleasure of long-term investment,” Sawakami said. “If the recovery in Japan’s stock markets continues, this will gradually change.”

Hurdles that have hobbled previous rallies have largely disappeared, Sawakami said. The reduction of cross-shareholdings, stakes held by banks in their customers to cement relationships, is mostly complete, Sawakami said. Selling to meet bank-capital and or solvency requirements will also be moderate, he said.

City banks and regional banks held 3.9 percent of the total amount of stocks by value in the year ended March 31, 2012, while life and non-life insurers owned 6.1 percent, both record lows, according to a survey by the Tokyo Stock Exchange. Companies’ stock holdings have also fallen from 30.1 percent in fiscal 1990 to 21.6 percent in fiscal 2011.

‘Weeding Out’

“Conditions are now in place for the market to rise,” Sawakami said. “Up to now we’ve seen across-the-board gains as a reaction to companies being oversold. Going forward, the weeding out process will begin.”

About 96 percent of the 1,709 companies on the Topix advanced this year through May 22, with 97 firms, including Tokyo Electric Power Co., Mazda Motor Corp. and Sony Corp. more than doubling.

The Topix rose to a 4 1/2 year intraday high of 1,289.77 on May 23 before plunging. Yields on Japanese government bonds touched 1 percent that day, the highest in a year and triple the record low reached in April after the Bank of Japan announced unprecedented bond buying.

As of April 30, the Sawakami Fund didn’t hold consumer finance and real estate stocks, companies most sensitive to interest rates. Banks, which are also sensitive, accounted for no more than 0.5 percent of its portfolio, according to data compiled by Bloomberg.

Sawakami Asset Management Inc. manages the Sawakami Fund, an open-ended equity fund with 297 billion yen under management. It’s the second-largest actively managed Japanese mutual fund after FMR LLC’s Fidelity Japan Growth Fund, according to data compiled by Bloomberg.

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