(Bloomberg) — In Japan’s stock market, companies have never been more profitable and investors never more skeptical.
Annual earnings on the Nikkei 225 Stock Average are poised to reach a record 21.6 trillion yen ($ 184 billion), according to estimates compiled by Bloomberg. At the same time, short sales peaked at 37.8 percent of all transactions on the Tokyo Stock Exchange on Jan. 6, eclipsing past highs after the index recorded its biggest quarterly advance in a year.
That’s what it’s come to after a two-year campaign by Prime Minister Shinzo Abe to invigorate Japan’s economy by weakening the yen and injecting stimulus. While bears have gotten bolder since the economy slipped into a recession, they’re missing a more important achievement in earnings, said Nicholas Smith of CLSA Ltd.
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“It’s difficult to know what people shorting the thing are looking at, because profits keep shooting the lights out,” Smith, a strategist at CLSA in Tokyo, said by phone on Jan. 28. “They’re like drunk goalkeepers jumping the wrong way.”
The Nikkei 225 rose 0.9 percent last week to cap a 1.3 percent January gain, while the Standard & Poor’s 500 Index sank 2.8 percent in New York to post its biggest monthly loss in a year.
Abe swept to power in 2012 promising to create a sustainable economic revival through monetary easing, fiscal stimulus and structural reform. The first arrow, fired by Bank of Japan Governor Haruhiko Kuroda in April 2013 and supplemented in October 2014, has seen the yen weaken 22 percent against the greenback over the past two years, buoying earnings at exporters.
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Net income for companies on the Nikkei 225 will swell 15 percent this fiscal year from 18.8 trillion yen in the prior 12 months, the previous record, and 12 trillion yen in 2013, according to data compiled by Bloomberg using analyst estimates for 219 of the gauge’s constituents. That will be the first time profits have increased for three consecutive years since 2007. Only five of the 225 companies in the measure are expected to report a loss this fiscal year.
Toyota Motor Corp., the nation’s biggest company, will post a record 2.16 trillion yen profit in the year ending March 31, an 18 percent increase on the previous year, the estimates show. Fast Retailing Co., the heaviest-weighted stock on the Nikkei 225, is projected to report 120 billion yen in net income this year, also a record, as a weaker currency boosts the value of sales at its overseas Uniqlo stores.
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On Abe’s third arrow of deregulation, bulls point to planned corporate tax cuts and signs that wages are finally rising as evidence of progress. Skeptics say Abenomics has only served to weaken the yen and boost stock prices, and that earnings growth will prove fleeting.
The Nikkei 225 surged 57 percent in 2013, beating all other developed stock markets in its biggest advance since 1972. Gains slowed to 7.1 percent last year, and the measure remains 55 percent below its 1989 peak.
“Net income is rising to a record, but it doesn’t mean that stock prices will also rise to a record,” said Soichiro Monji, chief strategist at Tokyo-based Daiwa SB Investments Ltd. “I don’t think people around me are that bullish, either. People are more concerned about the downside in macro factors.”
Recent economic reports provide ammunition for both optimists and pessimists. Bank lending unexpectedly rose at the fastest pace since 2009 in November, and Japan’s exports climbed more than forecast last month to the highest level in six years. The same month, retail sales unexpectedly fell and the nation’s inflation rate slowed more than forecast.
“Reform takes a long time, in any country,” said Khiem Do, who helps oversee about $ 60 billion as Hong Kong-based head of Asian multi-asset strategy at Baring Asset Management Ltd. and is bullish on Japanese shares. “The Abe government is on the right track to reflate the economy.”
Short-selling made up 29.4 percent of turnover in Tokyo on Friday and averaged 33.5 percent for the month. Bears took aim at energy explorers, commodity companies and insurers, data from the bourse show.
That so many are speculating on declines even as the outlook for company earnings improves is a buy signal to Seiichi Suzuki, a market analyst at Tokai Tokyo Securities Co.
“They’re not trading based on fundamentals, so this won’t last,” Suzuki said.
Recent peaks in short-selling have preceded rallies. Bearish bets surged on Oct. 30, the day before the BOJ unexpectedly increased its unprecedented monetary easing, including tripling stock investments, and the nation’s $ 1.1 trillion pension fund said it would double holdings of local shares. The Nikkei 225 soared as much as 15 percent through Dec. 8, when it closed at a seven-year high.
“Being short for anything longer than 48 hours, in any asset class where governments are involved, is dangerous,” said Andrew Clarke, director of trading at Mirabaud Securities Asia Ltd. in Hong Kong. “If governments feel they are being cornered, they will change the rules. People forget whose ball they are playing with, so to speak.”
CLSA’s Smith and Shinkin Asset Management Co.’s Tomomi Yamashita say the bearish investors are probably foreigners, with Ministry of Finance data showing net selling by overseas managers so far this year.
The Nikkei 225 fell 5.8 percent last year in dollar terms as the yen slumped 12 percent against the greenback. In local currency, the Nikkei 225 rose 1.3 percent this year, while the S&P 500 fell 3.1 percent.
“The foreigner looks at last year and says America did good, Japan did bad, bring my money home,” Smith said
For Shinkin Asset’s Yamashita, the short-selling ratio at a peak is a bullish signal, as investors will need to close the positions by buying back the shares they borrowed.
“I’m not worried,” Yamashita said. “They’re going to have to buy back at some point, which means there’s less downward pressure on the market. Shorting is a positive catalyst for the market.”
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