Japan Stock Futures Jump, Signal Support After $600 Billion Rout

Nikkei 225 Stock Average futures surged on June 7, signaling Japanese shares may arrest a three-week, $600 billion slump, according to Baring Asset Management Ltd., AMP Ltd. and Dai-Ichi Life Research Institute Inc.

Nikkei 225 contracts traded in Singapore, Chicago and Osaka jumped more than 4 percent following the biggest gain for American equities in seven weeks. Japan’s public pension fund said June 7 it would buy more shares. The Nikkei 225 has lost 18 percent since May 22 amid concern that the largest Japanese share rally in a quarter century had advanced too far, too fast. The broader Topix index retreated 17 percent.

Stocks may find support after the Government Pension Investment Fund, the world’s biggest manager of retirement savings, said it will sell bonds to buy equities. Prime Minister Shinzo Abe reiterated plans to reopen nuclear power plants, boost research and development spending and cut corporate taxes if he wins upper house elections next month.

The Nikkei 225 “will be up 2 to 3 percent and it will go from there,” Khiem Do, head of Asian multi-asset strategy at Baring Asset Management, which oversees about $51 billion, said in a phone interview from Hong Kong. “The yen weakened, the U.S. market is strong and there’s lot of newsflow from Abe-san, which are quite positive for the stock market. All that combined should be quite positive for the Nikkei.”

American Rally

The Standard & Poor’s 500 Index climbed 1.3 percent, the most since April 16, on June 7, following a report that showed more American workers were hired in May than economists forecast even as the unemployment rate climbed. The yen retreated after its biggest one-day gain against the U.S. dollar since 2010 left it trading at the highest level in two months.

The Topix index lost 6.9 percent in the week through June 7, the most since March 18, 2011, when the country was dealing with the immediate effects of a record earthquake and multiple meltdowns at the Fukushima Dai-Ichi nuclear power plant.

Almost $600 billion has been wiped from the value of Japanese equities in the last three weeks, according to data compiled by Bloomberg. It’s the first time since at least 2000 that the Topix has lost more than 4 percent across three consecutive weeks.

Japan’s broadest equity measure has swung an average of 3.8 percent daily since May 22, when it closed at its highest level since August 2008. Historic volatility is at levels not seen since the 2011 earthquake and nuclear disaster.

Shares pared losses on June 7 after the Health, Labour and Welfare Ministry said it would hold a press conference after markets closed about the asset allocations of the GPIF, as Japan’s public pension fund is known.

Selling Bonds

The GPIF, which had 112 trillion yen ($1.15 trillion) at Dec. 31, will cut its local bond holdings to 60 percent from 67 percent of assets while boosting holdings of local and foreign shares to 12 percent each from 11 percent and 9 percent respectively.

Nikkei 225 futures traded in Osaka and Singapore fell immediately after the press briefing to announce the changes.

The fund’s president, Takahiro Mitani, said in February that the allocation to Japanese government bonds was too great should interest rates rise as economic growth spurs inflation.

“I think there will be a big rally in the stock market on Monday,” Toshihiro Nagahama, chief economist at Dai-Ichi Life Research Institute in Tokyo, said in a phone interview yesterday. While the biggest boost will come from the reduced concern of U.S. tapering of stimulus, “GPIF’s increase on the stock holdings seems a little small, but it’s better than nothing,” he said. “It’s definitely a plus for stock that Prime Minister Abe commented on tax cuts on investment in their new strategy.”

Entered Correction

Data released by the National Bureau of Statistics in Beijing yesterday showed Chinese industrial production rose a less-than-forecast 9.2 percent from a year earlier and factory-gate prices fell for a 15th month. Export gains were at a 10-month low and imports dropped after a crackdown on fake trade invoices while fixed-asset investment growth slowed and new yuan loans declined.

The data add pressure on President Xi Jinping and Premier Li Keqiang to shore up growth less than three months into their tenure, after first-quarter expansion unexpectedly slowed. While the figures boost the case for easing monetary policy or approving more spending, the leaders’ room is limited by rising home prices, financial risks and overcapacity.

Share Retreat

After rallying about 50 percent this year through their high on May 22, Japan’s main equity gauges plunged and entered corrections on May 30.

The Topix traded for 13.44 times estimated earnings on June 7, down from 16.62 times on May 22. The gauge is priced about 8 percent below its three-year average valuation, according to data compiled by Bloomberg. The S&P 500 trades for 14.93 times estimated earnings, while the MSCI Asia Pacific Index costs 12.74 times.

Even after the correction, the Topix and Nikkei 225 have climbed nearly 24 percent this year, making the country the world’s best-performing major market, on optimism Abe and the BOJ can lift the country out of 15 years of deflation.

Investors plunged into Japanese shares as Abe’s government passed a 13.1 trillion yen supplementary budget to pay for his so-called “three arrows” policy of monetary easing, government spending on reconstruction and infrastructure, and structural reforms including tax relief, freer trade and more flexible markets. The Bank of Japan, led by Haruhiko Kuroda, said April 4 that it will double the country’s monetary base by the end of 2014.

The Topix surged 77 percent through May 22 from Nov. 14, when elections were announced that brought Abe to power.

“There’s been skepticism about the lack of detail regarding the the third arrow reforms,” Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors Ltd., which has about $126 billion under management, said yesterday. “But this is a fairly concrete move which allows the Japanese pension fund to have a higher allocation toward shares. And even though it’s just a marginal move, it still means an increase in demand for shares.”

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