Japan put on hold as investors await Abe’s next move

September 2, 2013 1:09 pm

Japan put on hold as investors await Abe’s next move

By Ben McLannahan in Tokyo

For a sense of how much the Japanese government frets about stock prices, take a look at the programme for Mizuho Securities’ autumn conference, beginning in Tokyo next Monday, for which about 320 foreign and 1,200 domestic investors – a record high – have signed up. The keynote speaker – on “Abenomics: the autumn siege” – is none other than Akira Amari, minister of state for economic and fiscal policy, and the right-hand man of Prime Minister Shinzo Abe. It is the first time in the conference’s six-year history that a member of the cabinet has agreed to speak.His appearance “is a message that the government cares about foreign investors”, says Yohei Osade, global head of pan-Asian equities at Mizuho.

Japan’s stock market, the world’s second biggest by total capitalisation of listed companies, is in need of some kind of fillip. Since Mr Abe swept to power at the end of last year it has been among the world’s best performers, lifted initially by hedge funds riding the profit-boosting effects of a weaker yen.

But so far this quarter the broad Topix index has slipped 1.4 per cent, dropping to the bottom quartile of the world’s major markets. That is a sharp reversal from the previous nine months, when it ranked fourth of 94, according to Bloomberg.

If the decline continues, it could threaten one of the key goals of Mr Abe’s growth strategy, which is to push domestic investors out of bonds and into riskier assets such as stocks and property. Such “portfolio rebalancing” is one of the main mechanisms through which the world’s third-largest economy is expected to haul itself out of years of deflation.

Hence Mr Amari’s appeal to Mizuho’s delegates. “Everyone wants to understand whether ‘Abenomics’ is real, and if politicians can make progress during the next Diet session beginning in October,” says Mr Osade.

Brokers say a shift in the market is under way. Much of the hedge fund money that swilled over stocks in the first half of the year has retreated, they say, replaced by stickier, longer-term money.

According to Bank of America Merrill Lynch surveys of fund managers with an average seven months’ investment horizon, global institutions have been “overweight” Japanese stocks for the past eight months in a row.

“Many people agree that the Japan story has not ended, which is why the long-only community is entering,” says Naohide Une, head of equity derivatives at Goldman Sachs in Tokyo.

Everybody is sidelined at the moment, waiting for catalysts

– Kei Murata, Monterey Capital Management

But analysts report that many funds are still looking for reasons to put on big positions.

On Monday the total value of trades among first-section stocks in Tokyo was below Y2tn for the 16th session in a row. That is a big step up from the same period last year, when volumes averaged just over Y800bn a day. But compared with the frenzy of April and May – which saw an average Y3.3tn of daily trades, peaking at a record Y5.8tn – August was a drag.

Kei Murata, chief executive of Monterey Capital Management in Singapore, says his equity long/short fund has reduced its gross exposure to Japan “close to 100 per cent” from May.

“Everybody is sidelined at the moment, waiting for catalysts,” he says.

Strategists note that the weeks ahead seem to offer better trading opportunities, from the decision over the host city for the 2020 Olympic Games next Friday – Tokyo is considered the frontrunner – to the meeting of the US Federal Open Market Committee the following week, which is expected to set so-called “tapering” in motion. Between those dates Japan releases revised gross domestic product datafor April-June, which may go a long way towards determining whether Mr Abe pursues plans to raise consumption tax next April.

Mr Abe’s final decision is expected on October 4, before a regional summit on economic co-operation. In the unlikely event that he chooses to scrap or postpone the tax rise, investors will take it as a “very negative” abandonment of fiscal discipline, says Hiromichi Tamura, chief Japan strategist at Nomura.

Pressing ahead, however, is likely to be seen as a signal that Japan’s economy is strong enough to withstand the fiscal squeeze. And if that decision comes with a supplementary budget and/or a monetary boost from the central bank, the market may pick up, says Mr Tamura.

Still, investors will stay alert for signs of progress on Mr Abe’s economic reforms, outlined before the summer. Discussions from mid-October are likely to focus on special deregulated zones to attract investment, integrated resorts and electricity-sector reform, notes Naoki Kamiyama, chief strategist at BofA, which is holding a big investor event the week after Mizuho.

As suggested by Mr Amari’s use of the word “siege”, none of these reforms will be easy.

For now, the listless market is reminding some investors of the all-too-frequent disappointments of the past, says Timothee Bousser, head of the global equity flow group, Asia, at Société Générale in Hong Kong.

“Japan has often been like a soufflé”, he says. “Now it is still in the oven, cooking. We all hope it will be taken out at the right time not to collapse.”