Japan Leads Global Volatility Decline to Seven-Year LowJonathan Burgos
Across global stock markets, nowhere is calm descending faster than in Japan.
The Nikkei Stock Average Volatility Index, which tracks the cost of options on the Nikkei 225 Stock Average, tumbled 33 percent this year to 15.3 yesterday, the steepest decline among similar gauges tracked by Bloomberg worldwide. The measure touched 15.1 on July 8, the lowest in seven years. It climbed 4.5 percent last week, compared with surges of 17 percent on the benchmark U.S. volatility index and 25 percent in Europe.
Japanese stocks have been aided by public institutions for more than a year. Unprecedented central-bank easing drove a 57 percent jump for the Nikkei 225 in 2013, and expectations for inflows from the nation’s biggest pension fund helped spur a 9.2 percent rebound from a May low. The gauge will climb another 7.9 percent by year-end, according to the average of 13 forecasts in a survey by Bloomberg News this month.
“There’s been an enormous rally in the Japanese market,” said Tim Schroeders, a portfolio manager who helps oversee $1 billion in equities at Pengana Capital Ltd. in Melbourne. “Risks over the direction of the yen, which could negatively affect the exporters, haven’t been priced in. Japan is on the right track but a lot of the stocks are probably priced to perfection.”
The calm in Japan’s stock market is mirrored in sovereign-bond trading. Historical price volatility on Japanese government bonds slid to a record low of 0.647 percent on June 30, according to data compiled by Bloomberg going back to December 1994.
The Nikkei 225 volatility gauge added 0.5 percent to 15.42 in Tokyo today, as the underlying stock measure rose 0.6 percent.
Concern about financial stability in Portugal reignited U.S. and European volatility last week, with the CBOE Volatility Index, the gauge of S&P 500 options prices known as the VIX, jumping 17 percent to 12.1. That pared its decline this year to 12 percent. The measure’s European counterpart, the VStoxx Index, surged 25 percent to 16.3 last week and has slipped 5.3 percent in 2014.
The U.S. Federal Reserve and BOJ have purchased trillions of dollars of debt to stimulate their economies. The European Central Bank last month became the first major policy-maker to charge fees on deposits, and is using measures including targeted loans to pump money into the region’s financial system.
“Central bank stimulus provides a floor on risky assets, particularly in Japan,” said Hans Goetti, a Singapore-based fund manager at Banque Internationale a Luxembourg SA, which manages about $40 billion. “The Japanese equity rally that started in May is to a large extent supported by public money.”
The BOJ today kept its record stimulus unchanged and forecast inflation will pick up to its 2 percent price target. The central bank stuck with its goal of an annual increase in the monetary base of between 60 trillion yen and 70 trillion yen ($690 billion), it said in a statement in Tokyo, as forecast by all 34 economists surveyed by Bloomberg News.
In Asia’s second-largest stock market, the HSI Volatility Index tracking option costs in Hong Kong slid 2.3 percent this year to 13.2. Chinese officials are rolling out targeted stimulus to help the nation reach its goal of 7.5 percent growth, while shunning the large-scale quantitative easing undertaken by the Fed and BOJ.
“You do have probably a bit more to be worried about in China than in Japan,” said Stuart Beavis, head of institutional equity derivatives at Vantage Capital in Hong Kong. There’s optimism in Japan given the huge amount of economic stimulus from the central bank. While recent economic data in China is improving, people aren’t getting carried away.’’
Japan’s industrial production rebounded in May, indicating that manufacturers are riding out a sales-tax increase as Prime Minister Shinzo Abe seeks to steer the economy through its aftermath. Still, machinery orders plunged that month by the most on record, a July 10 report showed.
After climbing as much as 12 percent from a May 21 low, the broader Topix index fell 2.3 percent last week as the yen capped its steepest weekly gain against the dollar since April.
Shares on the Nikkei 225 traded at 17.3 times estimated earnings yesterday, even after the gauge dropped 6.1 percent this year. The multiple for the Topix was 14.2 times, compared with 16.6 times for the S&P 500.
The most-owned options on the Nikkei 225 are 16,000 calls expiring in December, data compiled by Bloomberg show. The gauge closed yesterday at 15,296.82. Investors held 1.09 bearish contracts on the Japanese measure for every bullish one last week. Options pricing in a 10 percent decline cost 4.5 points more than wagers betting on a 10 percent increase, three-month implied-volatility data compiled by Bloomberg show.
Investors who are bullish on Japan point to fiscal and monetary stimulus as well as GPIF’s move to increase investments in Japanese equities. The nation will cut its corporate tax rate to below 30 percent over five years, Economy Minister Akira Amari said July 3.
The $1.2 trillion Government Pension Investment Fund will probably complete its asset-allocation review this autumn, Yasuhiro Yonezawa, the head of its investment committee, said July 9. Analysts surveyed by Bloomberg in May expect the fund to increase its Japanese stock target to 20 percent from 12 percent.
“We remain overweight on Japan,” said Khiem Do, Hong Kong-based head of Asian multi-asset strategy at Baring Asset Management Ltd., which oversees about $55 billion. “Japanese shares should benefit from the proposed cut in the corporate income tax rate and GPIF investments.”