Whither Japan Stocks: The Bullish Case for 2015

My last post presented a fairly downbeat and skeptical scenario for Japan’s stock market in 2015, particularly for U.S. dollar based investors. On January 2, in a taped interview, Suzuki Ryo, editor of The Nihon Keizai Shimbun’s Money and Investments page, presented the case for a Nikkei 225 average break through 20,000 yen in 2015.

Sounding eerily like a kabuya stock broker, Suzuki begins his forecast of “another good year” for Japanese stocks by citing two big “blessings”: a yen devalued to some 120 yen/dollar and USD 60-70imported oil. While these stock-price positive factors arrived late in 2014, it is likely, he suggests, that they will prevail during much or all of 2015.

Suzuki cites securities firms’ estimates that each factor will during 2105 add 5% to listed company profits, together boosting earnings 10%. In 2014 the average net income per share of Nikkei 225 companies was some 1,200 yen, which at a 15 times price-earnings multiple becomes a 18,000 yen Nikkei 225 index (the Nikkei average closed today, the first day of trading at 17,408, down 42 yen from its 2014 yearend close.).

The 10% boost from the cheaper yen and cheaper oil would elevate per share profits to some 1,300 yen against which a 15 time multiple would yield a Nikkei 225 average index of 19,500.

A second reason for optimism is differential U.S.-Japan monetary policy. Suzuki joins the market consensus on “the possibility” that the Fed will begin raising U.S. interest rates in July-September 2015.  By contrast, cheaper oil is being blamed by the Bank of Japan (BoJ)’s governor Kuroda Haruhiko for the failure so far of his “quantitative and qualitative easing” monetary policy to achieve his 2% inflation target.

With cheap or even cheaper oil in prospect for the rest of the year, a “third wave” of ramped up monetary stimulus is “a possibility” in the third quarter or so, suggests Suzuki, which would almost certainly further push down the yen, and boost stocks.

(Tellingly, a drop to 225 yen—i.e., only some 5 yen from the current level—is the number Suzuki gives in the event of a new burst of BoJ stimulus. He seems at pains to downplay the risk of a drastic yen drop as the market reacts to further, historically unprecedented BoJ experimentation, the ultimate consequences—and collateral effects—of which are unknowable., and could easily be negative, perhaps disastrously negative, for stocks.)

The third (and most convincing) factor in Suzuki’s upbeat analysis is “supply and demand.”   “This year there will be extraordinarily numerous buyers,” he avers, including, importantly, the Government Pension Investment Fund (see sidebar for details) that will be deploying some JPY 3 trillion into exchange trades securities.

The BoJ will also be buying JPY 3 trillion in ETFs.  (Market rumor is that BoJ is buying an ETF tied to the newly launched JPX Nikkei 400 Index of high ROE stocks.) Foreign investors are also expected to be net buyers at the level of JPY 3 trillion.

Japanese retail investors are expected to be increasingly active, not least in 401K-like NISA investment accounts—now totaling more than eight million–that were inaugurated in 2014.  In addition, listed companies stock buy-backs which were conducted at a level of JPY 4 trillion in 2014 are expected to continue at that level in 2015.

Having laid out such a rosy scenario, Suzuki appropriately introduces some “worrying factors” that could disturb or derail it.  Most likely to negatively impact the market would be some sudden disturbance or crisis overseas, most probably from Russia or, the perennial worry, China.

What do I think of Suzuki’s scenario? While I am not selling my Japanese stocks, my sense is that most of the positive effects and expectations he mentions are priced in the market, most evidently in fairly rich price-earnings ratios.

As I related in my last post, at 2014 closing figures, the price-to-book of Nikkei 225 company shares was 1.4 times, the consolidated reporting price-earnings multiple 15.96 times, and the dividend yield 1.37%.  For TSE first section stocks the PBR was 1.43 times, the consolidated reporting PER 16.94 times, the EPS yield 5.9% and the dividend yield 1.52%.

Not that I do not see any opportunities. Cross-cutting yen exchange rate and oil price movements have cast a pall on otherwise fundamentally strong sogo shosha like Mitsubishi Corporation (NASDAQ: MSBHY) which carries a price-to-book of .70 times and a forward PER of 8.88 times.

Still, my relative caution is a contrarian view. Most analysts seem to agree with Nikkei’s Suzuki that 2015 will be another good year for Japanese stocks. But they are talking about Japanese yen returns.

 

Nikkei Futures

nikkeifutures.org@imediaone.com

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