Calm Descends on Japan Stocks Amid Topix’s 19% Stealth Rally

Japan’s stock market, which for most of the last 2 1/2 years made the rest of the world seem peaceful, is calming down.

The 19 percent advance in the Topix index this year -- one of the two best starts in the past decade -- has come without the swings that characterized the rest of Prime Minister Shinzo Abe’s reign. In 2015, the gauge moved more than 2 percent on just two days, compared with at least 27 in each of the two previous years. Even after a near doubling of the market since 2013, options-based volatility is at an almost eight-month low.

It’s because of the Bank of Japan, says Mirabaud Asia Ltd. The central bank vowed in October to triple its purchases of exchange-traded funds, and has always bought this year on days shares dipped lower. While there are few complaints about a market that barely retreats, AMP Capital Investors Ltd. says the lack of declines makes it harder to add to holdings.

“No one’s afraid of the downsides for Japanese equities. There’s almost a numbness,” said Takuya Yamada, a senior money manager who helps manage 240 billion yen ($1.9 billion) for Astmax Asset Management Inc. in Tokyo. “The presence of the Bank of Japan is limiting the scope for losses.”

The central bank bought ETFs 37 times so far this year, spending 1.3 trillion yen, according to its own data. It started wading into the stock market in 2010 as a catalyst to spur more trading and promote “more risk-taking activity in the overall economy,” the bank said at the time. It tripled the annual ETF-buying budget in October.

Intraday Declines

On every day the BOJ added ETFs in 2015, the Topix posted an intraday decline, data compiled by Bloomberg show. Shares closed higher on three of the last five days the bank made purchases, from mid-May through Wednesday.

The Nikkei Stock Average Volatility Index, based on options prices, slumped to 17.37 on May 26, its lowest level since September. The gauge slid 0.9 percent to 18.39 in Tokyo on Thursday, as the Topix added 0.2 percent. The Nikkei 225 climbed for 12 days through June 1, the longest winning streak since 1988. The equity measure’s within 2 percent of its 2000 peak.

“The market has been rising very quietly,” said Naoki Fujiwara, Tokyo-based chief fund manager at Shinkin Asset Management Co. “There’s very little concern out there.”

Bulls say the rally’s justified by Japan company earnings growth -- Goldman Sachs Group Inc. is forecasting a 22 percent increase this fiscal year -- and government pressure on firms to boost shareholder returns, spurring higher dividends and share buybacks. Foreign investors added money to the market for seven of the eight weeks through May 22, the most recent data from the exchange show. Barclays Plc is recommending investors hold twice as many Japanese shares as in its benchmark.

Correction Coming

The ascent has Nader Naeimi, a fund manager at AMP Capital Investors Ltd. in Sydney, feeling nervous. He says Japanese shares are due for a correction and could drop by 10 percent. Valuations relative to bonds are stretched and other markets in Europe and Asia are more interesting to investors, he said.

“Japan had a strong run, and you’ve had strong earnings growth already, so you need a little bit of correction before resetting the clock and going back into Japan,” said Naeimi, who helps manage AMP’s $125 billion as head of dynamic asset allocation. “Even though I have a position in Japan, and I do look to increase my position, I want to see a selloff first.”

The lack of declines in equities has made it harder for traders like Andrew Clarke to do business in Japan. The director of trading for Mirabaud in Hong Kong says he has about 20 orders to buy about $200 million worth of shares in Japanese companies if prices fall about 10 percent. Meanwhile clients are looking at more volatile markets like China and Hong Kong, he says.

“Japan’s in no-man’s land,” Clarke said. “Japan will correct normally, hopefully, and buyers will emerge to take advantage of a pullback and from there on we will continue the bull market.”

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