Foreign Investors Rush to Sell Japanese Stocks; Worries Grow That the Government Won’t Spur the Economy

Foreign Investors Rush to Sell Japanese Stocks
Worries Grow That the Government Won’t Spur the Economy
KOSAKU NARIOKA
March 20, 2014 8:12 a.m. ET
After pushing Japan’s stock market to its biggest gain in more than 40 years in 2013, the bulls are having second thoughts.
Foreign investors are selling Japanese stocks at the fastest pace in almost a decade, government data show, as worries grow that the country’s government won’t be able to follow through on its promises to spur the economy. Hedge funds and other speculative investors lifted the ratio of bets against Tokyo shares this week to the highest in five years, according to the Tokyo Stock Exchange.

That has helped drive down the Nikkei Stock Average 13% in 2014, after a 57% jump last year. By contrast, the S&P 500 index had eked out a 1% gain through Wednesday.
Philip Saunders, who helps run a $670 million fund at Investec Asset Management in London, has been selling Japanese stocks. He trimmed the fund’s stock allocation to Japan to about 12% to 13%, from 15% to 16% at end of last year.
Mr. Saunders said Japan’s economy hasn’t shown enough signs to convince him it has entered into a sustainable growth path.
“We need more evidence, and we need to see earnings continue to come through positively,” Mr. Saunders said.
Instead, evidence is mounting that the brief uptick in Japan’s economy is faltering. The latest sign of economic weakness came in the past few weeks. Many companies haven’t raised wages, which indicates a lack of confidence among Japanese corporations. A stronger yen is also hurting exporters, a reversal after two years of currency losses.
As well, a reduction of corporate taxes and a relaxation of strict labor protection — both favorable to corporations and closely watched by investors — have done little to bolster optimism. The government, led by Prime Minister Shinzo Abe, is widely expected to come up with another package of growth strategy in June.
“There has been little progress in economic policy this year…Everything has been delayed,” said Shun Maruyama, chief Japan equity strategist at BNP Paribas Securities.
Data from Japan’s finance ministry showed foreign investors sold a net 1.1 trillion yen ($11 billion) last week, the biggest move since 2005. The ratio of bets against Tokyo shares rose to 36% on Monday — the highest in five years, according to the exchange.
Some investors though say that after such a sharp run up last year, this is a natural pull back, and Japanese corporate earnings will continue to improve, propelling stocks higher. They are confident because companies have become more efficient in generating profits after going through years of the yen’s strength and because firms are motivated to spend more now if prices rise as that will erode the value of their cash holdings.
Alex Kydd, who co-manages the $140 million SR Global Japan fund, said that while his fund has cut back on some bullish bets, he is anticipating the market will soon rebound.
“Would corporate profits surprise as much as they did in 2013? Probably not, but can they come through better than expected? Yes, I think they can,” he said.
Japan’s companies next report earnings beginning in late April.
Other hurdles remain. Japan is set to raise the country’s sales tax, leading to higher prices and likely damping already fragile consumer spending. Meanwhile, the Bank of Japan has kept its policy unchanged for months, disappointing investors who have anticipated more easing.
“There is an outstanding question of how much this rise in consumption tax will be a drag on consumption, therefore growth,” said Matthew Merritt, head of a multi-asset strategy team at Insight Investment, a U.K. asset manager. He said he reduced Japanese stockholdings this year from last year in a pool of 1 billion sterling ($1.65 billion) he manages.
Already there is disappointment with Japan’s economy which grew more slowly than initially calculated in the final three months of 2013, dragged down by weaker spending by both companies and consumers. Still, in its latest monthly report, the government stuck to its relatively optimistic view of the current state of the economy, amid a pickup in production. Many investors say Japan’s monetary and fiscal policies have had some success, but the economic and structural reform, or so-called “third arrow,” hasn’t.
“We think the market became a little too optimistic about the ability for the ‘third arrow’ to be implemented quickly,” said, Dan Chamby, a portfolio manager at BlackRock’s $59 billion Global Allocation Fund. He said the fund trimmed its Japanese stockholdings to 8.3% from 8.5% at the end of 2013.