Outlook for Japanese Stocks: A Rising Sun

Originally published on April 10, 2009

Japan’s lackluster stock market may be poised for more hefty gains pretty soon.

With the yen trading at near-6 months lows vs. the dollar, earnings of exporters will get a big boost come the second quarter. Indeed, Japanese exporters are already beginning to see an uptick in sales while they expand operations.

Friday, Nintendo (NTDOY.PK) announced that sales of its handheld video console, Nintendo DSi, has already topped 600,000 units in the U.S. and Europe. The company is not planning any price cuts for its white-hot consumer favorite the Wii, either.

Other Japanese exporters are expanding in the economic contraction. Telecoms giant DoCoMo (DCM) has just splashed out 31 trillion yen ($31 billion) on shopping firm Oak Lawn Marketing, while 7 Eleven Japan announced this week that it would open up stores soon in Indonesia.

Meanwhile, the country’s ruling coalition parties are looking to create a package worth up to 50 trillion yen , or around $50 billion, to buy back domestic shares, according to a report Wednesday by Nikkei. The plan would utilize public funds to exercise the buy-back.

Given that the total market capitalization of Japan’s largest exchange, the Topix, is just 170 trillion yen ($170 billion), it’s difficult to see how shares can go much lower if plans for the buy-in fund go ahead.

“Even if this fund comes about and is used ‘as support’ when the Topix saw its lowest point, it would equate to nearly 50% of [the market's] market cap. Effectively the Japanese government is setting all of us a floor,” writes Gavin Parry, head of Hong Kong-based Japanese and Asian trading specialist Helmsman Global Trading in a client market brief Friday.

In addition, Japan’s government has supplied its economy with a $154 billion stimulus package.

With the recent re-capitalization frenzy underway, Japanese machine orders expanded 1.4% in March, reversing a fourth month cycle of continued declines and beating expectations by a whopping 8.3 percentage points.

Not all is completely rosy in the land of the rising sun, however. Electronics maker Toshiba (TOSBF.PK) is scaling back domestic operations, while Canon (CAJ) cut its 2010 revenue target by four times, to 150 billion yen ($1.5 billion). Most recently, automaker Honda (HMC) is busy slashing costs by 100 billion yen ($1 billion) in order to maintain profitability.

Still, much of these plans are based on a strong yen valuation, which hits exporters hard when they convert overseas earnings from the U.S. and Europe back into their domestic currency. Recently however, the yen has been easing quickly vs. the dollar: in less than two months, the currency has slipped by over 10% in value, to around 100 yen vs. the dollar. If market conditions hold up stateside, a continued weaker yen value is likely to remain in place, and even continue.

Despite a 20% rise in the Nikkei since mid-March, at 8,964.11 points the index is still trading some 38% below its 52-week high. With production on the up, a weaker currency, and internationally unparalleled government intervention to bolster domestic markets, it’s difficult to see what can keep Japanese shares from rising in the near term.

Indeed, having experienced such a colossal devaluation for such an extended period, Japanese equities may turn out to be the ultimate value investor’s windfall bet this year in Asia.

Disclosure: None

Comments

[Steven Towns:]

Not quite feeling your optimism, and I still think the broader and deeper negatives far outweigh any incremental positives such as 7 Eleven opening up in Indonesia. And you should really take note that your figures for the DoCoMo - Oakmark deal and the size of Topix-1 are way off the mark: the former was a deal for Y31B or about $310M, not Y31T/$31B! The Topix-1 is definitely not $170B! At Y170T, it's more like $1.7T!

Apr 14 02:40 PM

[Lance:]

I should get excited about Japanese shares in general because DoCoMo is buying a majority stake in a business that they seem to have absolutely little or no experience in? A business seemingly well outside the boundaries of its traditional business? A business that seems to have done well last year marketing a workout DVD?

While it does suggest the DoCoMo had some chump change (~300 million dollars) burning a hole it its pocket, it also suggests that DoCoMo believes that its own business is not where it should be investing money right now. Generally, to me, this is not a "The Sun Is Rising" kind of signal.

I think you need to pay more attention to employment in Japan. Right now, pretty much no one feels secure about his or her job. Until that changes, the economy is not going to show much life.

And Seven & I Holdings is not really what I would call an exporter, either.

Apr 14 05:23 PM

[William Cowie:]

Japan's problems are more deeply rooted than a temporary dip in the exchange rate can cure. The core of economic growth is competitive strength, but their keiretsu structure of businesses reduces competition. Captive vendor bases become uncompetitive over time. And that's a cultural value, it will not change soon. Japan's economic miracle was in large part based on an artificially low currency and incremental cost reductions in technologies that were nearing maturity. Those two circumstances will never return.

Look at fundamentals: productivity growth has stagnated, as has population growth. Consumers are not going to embark on American style conspicuous consumption, except perhaps at an urban fringe or two. The government disallows cheap American food to enter the country. In fact, they allow nothing cheap into the country, so consumers are stuck with disposable income that buys them very little. Some part of that is cultural, some part is simply the government ripping off their own people. Neither are going to change any time soon.

Japan is finding its proper level in the world economy, which is a player, but not a leader. That process is not done yet, and won't be complete in the next year or two, either.

Apr 17 09:06 PM

[Daniel Harr...:]

William - I am with you insofar as the previous period is concerned (pre-07). But with the recent global shake up, politically and economically, more risk has been exported to Japan (mainly via banking deals, e.g. MS-MFUG), which will create a more dynamic environment in terms of returns. It's just impossible and ridiculous to believe that Japan will remain a sluggish, predominantly depositary institution unaffected by the growth of Asia next to it which is taking off at an unprecedented rate.

Apr 18 12:05 AM