Japanese Shares Gain Amid Optimism Ahead of BOJ, Fed Decisions

  • Nikkei 225 falls amid speculation BOJ may adjust ETF purchases
  • Topix cheaper than U.S., Europe shares as valuations sink

What Can We Expect From the BOJ's Next Move?

The Topix index rose, with power producers and telephone stocks leading the advance, amid optimism the Bank of Japan will continue to support equities.

The Topix gained 0.4 percent on Tuesday as it resumed trading after a public holiday Monday. The measure recorded its longest losing streak since April 2014 last week before halting the decline on Friday, amid uncertainty over what the BOJ will do after its two-day policy meeting through Wednesday. The Fed will also give its decision on whether to raise interest rates, with futures markets seeing a chance of just 20 percent that it will act this month.

“Hopes for the BOJ may be underlying the current move,” said Hiroaki Hiwada, a Tokyo-based strategist at Toyo Securities Co. “With some of the larger shares rising, I get the impression that more long-term investors are coming into the market. With the BOJ buying exchange-traded funds, there’s little concern the market will go lower as well.”

SecurityPercent ChangePrice
Nikkei 225-0.2%16,492.15

The Nikkei 225 Stock Average ended 0.2 percent lower on speculation the BOJ may stop purchases of exchange-traded funds tracking the gauge amid criticism its use of the measure is distorting the market and instead shift buying to the Topix and JPX-Nikkei Index 400. Nicholas Smith of CLSA Ltd. said on Friday he’s “absolutely certain” the central bank will stop the purchases.

Fast Retailing Co., the most heavily weighted stock on the Nikkei 225, sank 5.4 percent. The BOJ’s ETF purchases have buoyed the company’s stock, making it relatively expensive, said Nobuyuki Fujimoto, a senior market analyst at SBI Securities Co.

Japan’s central bank should continue both asset purchases and its negative interest rate policy, partly to prevent a stronger yen, Koichi Hamada, an adviser to Prime Minister Shinzo Abe, told the Tokyo Shimbun newspaper. Any debate to cut back on the central bank’s easing program now will bring back a pre-Abenomics, deflationary age, he said.

BOJ Forecasts

Some analysts say the BOJ’s decision to undertake a comprehensive review of its easing program underscores the central bank’s struggle to hit the 2 percent inflation target, and bolsters arguments that it had reached the limits of its powers. Others expect the review to lead to greater efforts by the central bank to stoke inflation and revive growth.

“An optimal scenario for Japanese stocks would be if the BOJ puts off any deeper cut into negative rates, while maintaining its easy stance on monetary policy,” said Masahiro Ichikawa a Tokyo-based senior strategist at Sumitomo Mitsui Asset Management Co. “But with the outcome of the BOJ’s meeting tomorrow, investors weren’t making aggressive moves.”

The Topix has slumped 15 percent this year, the worst performing developed market after Italy and Portugal, as investors grew less confident Prime Minister Shinzo Abe’s growth strategy will succeed in boosting the economy. The measure trades at 13 times earnings estimates, compared with 18 times on the S&P500 Index and 16 times for Europe’s Stoxx 600 Index.

Volume on the Topix was 6.7 percent above the 30-day average on Tuesday.

  • Aeon Fantasy Co. advanced 5.3 percent after the amusement-park operator said existing branch sales grew 2.8 percent in August.
  • Telecommunication shares rose after Nomura Holdings Inc. said the iPhone 7 is likely to boost Japanese mobile carriers’ profits. NTT Docomo Inc. and KDDI Corp. both climbed 1.7 percent.
  • Takata Corp. tumbled 12 percent after Bloomberg reported on Monday that the air-bag supplier that’s behind the automotive industry’s biggest safety recall is moving forward with an auction of the company. Some of the bidders are considering the possibility of some form of bankruptcy proceedings for Takata to mitigate the liabilities, according to people familiar with the matter. 

Futures on the S&P 500 Index rose climbed 0.2 percent. The underlying equity gauge closed little changed on Monday. On Friday, a report showed the cost of living in America rose more than projected in August, indicating inflation continues to move closer to the Fed’s goal. Separate data showed consumer confidence in September held at the lowest level since April, with views of current economic conditions falling to an almost one-year low.

Traders see a 56 percent possibility the monetary authority will raise rates by December.

“If the Fed does show that they won’t force a rate hike, it could create a sense of relief in the market,” said Kiyoshi Ishigane, chief strategist at Mitsubishi UFJ Kokusai Asset Management Co. in Tokyo. “Personally, I think there’s no reason for them to hurry, but we need to confirm this.”

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