Mitsumaru Kumagai thinks the recent Nikkei drop is a temporary blip
It’s time for Japanese investors to switch to a positive mindset, with the prospect of an improved stock market and economic growth set to outweigh the effect of a future hike in interest rates, AsianInvestor’s second annual Japan Institutional Investment Forum heard yesterday.
The event was staged in Tokyo less than 24 hours after the domestic stock market plunged almost 4% on June 5 amid criticism that prime minister Shinzo Abe's speech outlining the third arrow of his reform agenda – namely, how to inject economic growth – was insubstantial.
Nonetheless, Mitsumaru Kumagai, chief economist for Daiwa Institute of Research, said the correction that has occurred since the May 22 peak was only a temporary adjustment of speed. He forecasts that the Nikkei 225 will hit 15,000 to 16,000 by the end of this fiscal year next March.
That would put prices at about 90% of their 2007 peak, which he reckoned would not represent an overvaluation, with the stock market having increased in value by ¥100 trillion ($1 trillion) since the arrival of Abenomics.
Kumagai argued that the market rally, combined with yen depreciation and rising GDP, would overshadow any future rise in interest rates, which appear to be holding Japanese investors back.
The conference heard that overseas investors hold 30% of Japan’s stock market, but account for 60-70% of average daily trading – meaning Japanese investors are selling and being too passive.
“It is now turning into a market for foreign investors,” said Yasuyuki Konuma, and director of new listings at the Tokyo Stock Exchange. “We would like to encourage greater participation by Japanese investors.”
He noted the ratio of retail investors in the domestic equity market had increased from 15% to 25% in recent weeks, but conceded that on a relative basis they were selling. “They need to review the investment change, perhaps,” he said.
A key point is that Japanese corporations are sitting on ¥200 trillion in reserves. “They need to look to enhance corporate value,” Konuma said. “They are not thinking through their role in corporate governance – communication and engagement needs to improve between investors and corporations. Doing so will enable us to optimise the market.”
But this phenomenon of sitting on cash is not exclusive to Japan, with US corporations similarly keeping their powder dry despite an upturn in the economy. Movement in the M&A market is also slow.
But Yuji Kage, senior adviser to Blackstone Group Japan, said the investment policies and assumptions of the Japanese government had changed and that investors similarly need to adjust.
Only last summer deflation was viewed as preferable over inflation, with everyone in risk-off mode. However, now that has switched and a zero interest rate is no longer viable. “Therefore the risks in our existing portfolio have risen and our portfolio needs to be transformed,” Kage said. “If you switch from yen appreciation to depreciation, interest rate hike pressure is what we should prepare for.”
He noted this was not just the impact of Abenomics, but was backed by the real economy, with the US recovery supported by the shale gas story, meaning investors can expect the dollar to be stronger. With no exit strategy from quantitative easing in sight from the US Federal Reserve, “investors around the world need to switch from risk-off mode", Kage said.
Kumagai said it was not encouraging that Japanese investors were not buying equities, and suggested one key reason is that shareholder return is insufficient, explaining why ¥200 trillion is sitting in cash.
“Japanese corporations are not seeing a good outlook in the future, and are just trying to survive their debts,” he noted.
They should strengthen corporate governance, but also turn to capital expenditure, said Kumagai. “They think we should be extremely fearful of an interest rate rise. But when the economy is good, interest rates go up. [Bank of Japan governor Haruhiko] Kuroda is suppressing the interest rate through artificial means.”
He suggested that interest rates going up would be a reflection of an improving economy and a rising stock market, and would be positive. “There should be a shift away from savings to investment, and ¥200 trillion will move into securities if the government’s 2% inflation rate is achieved,” Kumagai said.
Nonetheless conference participants questioned whether Abe’s gentlemanly approach was going to work in achieving his third arrow, growth. “Unfortunately the growth strategy announced [by Abe on June 5] was general, piecemeal and small,” said Kumagai. “I have to be critical.”
He suggested Abe had glossed over the most important points, noting that the core substance on how he planned to increase household income by ¥1.5 trillion was weak and lacking in detail.
Kumagai argued that corporate income tax needs to be cut from around 35% to 20%, and that agricultural policies were not headed in the right direction from the perspective of export competitiveness.
“The vested interests are too strong and they are preventing reform,” he said. “Is the agricultural policy about a growth strategy or protecting the socially weak?”
He reasoned that there were strong vested interests across the agricultural, medical and healthcare sectors, and that labour and industrial relations were holding back reform. “We do not see enough effort to tackle them."