Fading Japanese market momentum frustrates investors

It was only seven months ago that Haruhiko Kuroda stunned investors by announcing a radical new era of easing at the Bank of Japan.

But for many Japan watchers, it seems a lot longer than that.

As excitement over the world’s second-biggest stock market has faded, some are now crying out for another jump-start.

Money from abroad is still coming in, rising to a year-to-date total of $108bn in the last week of October, as institutional investors start handing out mandates to Japan managers. But having ranked as the best-performing major market over the first six months of the year, Japan has languished in the bottom half of the pack since then.

“The market needs more than mega long-only pension funds accumulating [stocks] on weakness, which doesn’t drive prices,” says Peter Eadon-Clarke, head of Japan research at Macquarie Securities in Tokyo. “We need those aggressive macro traders looking for a mini-replay of the BoJ’s major loosening at the beginning of this year.”

With or without another nudge from Mr Kuroda, something needs to happen, say analysts.

The rally that began exactly one year ago, when former prime minister Yoshihiko Noda called the election that would sweep Shinzo Abe to power for a second time, has not come close to reclaiming its peak of late May, when fears over US tapering jolted world markets.

The awarding of the 2020 Olympics to Tokyo in September did not provide much of a lift. Neither did the government’s October decision to increase the consumption tax, which had been seen as a test of Japan’s determination to put its state finances in order as it tries to haul itself out of more than a decade of mild but persistent deflation.

A good first-half earnings season thus far has not roused investors either. As Morgan Stanley notes, only those companies beating forecasts by more than 10 per cent have seen a surge in their share prices.

The TS multiple – or the Topix index divided by the S&P 500, described by Mizuho strategist Yasunari Ueno as “a report card on ‘Abenomics’” – has recently dropped below 0.7 times, and continues to fall.

“Overseas investors are now less inclined to put their faith in further progress,” he says.

So eyes are turning once more to the BoJ, where the governor has promised to supply more stimulus should the economy weaken next April when taxes go up. But some say the central bank cannot wait that long.

A pledge to buy even more assets at the BoJ’s meeting next week could weaken the yen once more, pushing up profits at exporters, and would send the broader message that Japan is absolutely serious about emerging from deflation, says Mikio Kumada, Hong Kong-based global strategist at LGT Capital Partners Asia, which manages the assets of the House of Liechtenstein.

Another carrot could be the completion of talks to create the Trans-Pacific Partnership, a trade grouping of Japan and 11 other nations, which could happen by the end of this year.

But this and other “third-arrow” structural reforms need to be seen to be advancing, say analysts, especially in light of the Rakuten row. Last week Hiroshi Mikitani, the founder of Japan’s largest online shopping site, complained that a government decision to exclude some over-the-counter medicines from an internet sales law was a victory for vested interests and suggested the Abe administration was ducking difficult reforms.

The chief Asian investment officer at one major global asset manager says foreign investors are getting increasingly “antsy” with the apparent lack of progress.

“Personally, I wouldn’t be a major buyer of Japan,” he says. “If you buy now you are still buying on hope.”

This impatience bothers some market veterans. Japan has always been a slow-burn story, says Rupert Kimber of London-based Tiburon Partners, who runs a £1.5bn ($2.4bn) open-ended fund.

The growing appeal of the Japanese market has little to do with the return of Mr Abe, he says, and everything to do with the likes of Japan Tobacco, which said last month it would shut plants and cut 15 per cent of its domestic workforce to protect profits.

“If the Japanese labour market is so rigid and unmovable, those things aren’t possible, are they?”

But others note that Mr Abe has set out his stall, urging investors to “buy my Abenomics”. In that context, initiatives under the third arrow have to be seen to be on course.

“You can talk about trying to do the right thing as much as you want, but you actually have to see it implemented,” says Catherine Yeung, Hong Kong-based investment director at Fidelity. “The jury is still out.”

November’s survey from Bank of America Merrill Lynch found that global fund managers trimmed their Japan exposures in October for the first time since July. As an investment destination over the next 12 months, Japan was ranked about even with the UK, and a long way behind Europe.

“For the time being we remain overweight [in Japan], but we’re challenging our own patience, so to speak,” says Mr Kumada of LGT.

Additional reporting by Josh Noble in Hong Kong