Topix Finds Friend in Bernanke as Abenomics Rally SlowsYoshiaki Nohara, Masaaki Iwamoto and Masahiro Watanabe
Federal Reserve Chairman Ben S. Bernanke’s plans to reduce stimulus are just what Japanese stocks need to revive the biggest rally in three decades, if history is any guide.
The Topix index has rallied in anticipation of tighter U.S. monetary policy each time the Fed has signaled a major change of direction since 1986, according to data compiled by Bloomberg. The Japanese equity benchmark rose an average 30 percent in the 12 months before increases in the target rate for loans between American banks in 1986, 1994, 1999 and 2004, the data show.
Bulls say the prospect of slowing U.S. bond purchases and an expanding American economy will strengthen the dollar and boost profits at exporters from Toyota Motor Corp. to Nintendo Co. Bears say the yen may gain because a self-sustaining U.S. recovery is no sure thing and Prime Minister Shinzo Abe’s policies won’t do enough to spur stocks higher.
“Japan will continue to keep monetary easing for a long time, while the U.S. shifts toward stimulus tapering because its economy is good,” said Isao Kubo, a Tokyo-based equity strategist at Nissay Asset Management Corp., which oversees about 6.1 trillion yen ($62 billion). “The yen is likely to fall and Japanese stocks will rebound while U.S. stocks move little. That’s my main scenario.”
Stocks rose last week, with the Topix alternating between gains and losses that averaged more than 2.4 percent a day. The benchmark gauge for Japan equities climbed 2.5 percent to 1,196.17 on Aug. 2, pushing the rally to 66 percent since elections were announced that brought Abe to power, even after shares fell for three months through July in the longest streak since September 2011. The Topix declined 1 percent to 1,184.74 today in Tokyo, paring its 2013 advance to 38 percent.
More than $800 billion had been added to Japanese stock values in 2013 through Aug. 2 as the fiscal and monetary stimulus sought by Abe sent the Topix to the biggest gain among developed markets. The government will spend 10.3 trillion yen to boost growth and encourage private investment, officials said in January, before the Bank of Japan on April 4 pledged to double its monetary base in two years to reach a 2 percent inflation goal.
The Topix decreased 7.2 percent since reaching a 4 1/2-year high in May and was down as much as 18 percent in June as the yen, which has depreciated 15 percent against the dollar since Abe’s Liberal Democratic Party reclaimed power in December, rebounded. While the retreat coincided with losses in the Standard & Poor’s 500 Index that reached 5.8 percent between May 21 and June 24, the American gauge has recovered and closed at a record 1,709.67 on Aug. 2.
Rallies lost momentum in both countries after Bernanke said on May 22 that the central bank was planning to start paring stimulus. The Fed may reduce its $85 billion of monthly bond-buying from later this year and halt it around the middle of 2014, should the economy improve, Bernanke said June 19.
“The Fed’s tapering certainly works to weaken the yen, but it also has a downside of lowering investors’ risk sentiment,” said Tetsuo Seshimo, a Tokyo-based portfolio manager at Saison Asset Management Co., which oversees about 74 billion yen.
Tightening by the Fed would help Japanese equities rather than hinder them, said Ayako Sera, a Tokyo-based market strategist at Sumitomo Mitsui Trust Bank Ltd., which has about 35 trillion yen in assets.
“If the Fed correctly times when to begin tapering, the dollar will strengthen along with the U.S. economy,” Sera, who predicts the Topix will rise 9.7 percent by year-end, said in a July 22 interview. “That’ll be a plus for stocks.”
The Topix surged an average 30 percent in the 12 months before each of the Fed’s four major tightening cycles since 1986, data compiled by Bloomberg show. The Standard & Poor’s 500 Index had a mean return of 15 percent for the periods.
The last series of U.S. rate increases began in 2004, when Alan Greenspan and Bernanke raised the fed funds rate to 5.25 percent from 1 percent. Japanese stocks rallied 32 percent, about twice the S&P 500, in the year leading up to it. The Topix climbed 15 percent before the Fed started boosting in mid-1999. Anticipation of the 1994 increases sent the equity market up 24 percent, and it rallied 50 percent prior to a 1986 increase.
The Topix’s 27 percent climb from November through January was its steepest three-month advance since 1993. Shares on the gauge traded at 15 times estimated earnings as of Aug. 2, compared with 15.5 times for the S&P 500 and 13.8 times for the Stoxx Europe 600 Index.
The ruling coalition’s landslide poll win on July 21 secured control of both chambers of parliament for the first time since 2007. Investors’ wish list for reforms include lower corporate taxes, law changes to make it easier to fire workers, and a higher sales tax to rein in the world’s heaviest sovereign debt burden.
Abe is likely to disappoint, said Makoto Kikuchi, chief executive officer at Myojo Asset Management Japan Co. in Tokyo.
“Foreign investors expect Abe to make painful regulatory changes,” Kikuchi said. “But I don’t think he’s committed to drastic measures. If nothing comes out by September or October, overseas investors will question his determination.”
The prime minister instructed his government to consider four options including freezing the planned two-step increase of sales levies, the Nikkei newspaper reported last month.
Even if the yen does fall, Japanese stocks are likely to slide as higher raw material and fuel costs choke profitability at iron and steel, paper and chemical firms, said Kikuchi, who forecasts the Topix will retreat 20 percent to 950 at year-end.
Most stocks strategists surveyed by Bloomberg expect the rally to resume. The Topix will advance 7.2 percent to finish the year at 1,270, according to the median estimate of 18 analysts. Nomura Holdings Inc. is the most bullish, predicting a 27 percent jump.
The yen will extend its 12 percent decline since Dec. 31, sinking to 108 per dollar by the middle of 2014 from 98.43 as of 3:30 p.m. in Tokyo, according to a separate survey.
“Japanese stocks are more sensitive to the currency than shares in the U.S.,” said Masaaki Yamaguchi, a Tokyo-based equity market strategist at Nomura, by phone on Aug. 2. “The Fed will start tapering when it’s certain the U.S. economy is robust, and so the yen will fall, meaning Japanese stocks are likely to outperform.”
Profits for companies in the Topix almost doubled this earnings season, according to data compiled by Bloomberg using quarterly results from 1,054 firms in the 1,708-member gauge.
Net income at Toyota, which has a market value more than twice that of any other Japanese company after its shares gained 59 percent this year, jumped 94 percent in the three months through June compared with the same period a year earlier. The company raised its profit forecast for the current fiscal year by 8 percent as the weaker yen bolsters the value of Japanese cars sold overseas.
Nintendo, developer of the Wii console, posted profit of 8.62 billion yen last quarter, overturning a loss a year earlier due to a 16.9 billion-yen currency gain. Nissan Motor Co., which gets more than 80 percent of its revenue outside of its home market, said in May that a one-yen drop against the dollar boosts operating income by 15 billion yen.
Japan’s gross domestic product rose an annualized 4.1 percent in the first quarter, the Cabinet Office said June 10. The office raised its assessment of the economy for a third straight month on July 23. Consumer prices apart from fresh food climbed 0.4 percent in June, the most since 2008, the statistics bureau said on July 26.
Akio Yoshino, chief economist in Tokyo at Amundi Japan Ltd., expects the Topix to reach 1,280 by Dec. 31.
“The beginning of the Fed’s tapering equals strong U.S. growth, and that means Japan’s exports to the U.S. will pick up,” said Yoshino, whose firm oversees about 3.3 trillion yen in assets. “Japanese companies will benefit not only from a weaker yen, but also from better business stateside. Their earnings will be revised upward and Japanese stocks will extend gains.”