JAPAN
27 December 2013
Tokyo's stock market
Tokyo's stock market has taken off this year, apparently boosted by "Abenomics" and the decision to hold the 2020 Olympic Games in Tokyo. How long will the party last?
Tokyo's stock market has taken off this year, apparently boosted by "Abenomics" and the decision to hold the 2020 Olympic Games in Tokyo. How long will the "stock-market party" last?
Before delving into this question, it is worth highlighting that Tokyo still has one of the world's most important stock exchanges. With its 3400 listed companies (including 30 foreign companies), Tokyo has the world's third largest stock exchange by listings, coming in after Mumbai and Toronto. In terms of market capitalization, it has also the world's third largest. And based on market turnover, it has world's fourth largest.
Indeed, the Tokyo Stock Exchange can trace its roots back to 1878. Despite the global and regional preoccupation with China, that country's leading stock exchange of Shanghai still ranks behind Tokyo. The Tokyo Stock Exchange supports trading in bonds and derivatives (like stock index futures and and equity options), as well as equity stocks.
The Tokyo Stock Exchange enjoyed its heyday in Japan's bubble economy in the 1980s, with the Nikkei index reaching almost 40,000 points. It then crashed in the early 1990s, and has since fluctuated between 10,000 and 20,000. See note below on Tokyo stock market indexes.
With the return to power of Prime Minister Shinzo Abe one year ago, and the advent of Abenomics, the Tokyo Stock Exchange has taken off again. On 21 November 2013 it stood at 15,366, up from 10,395 at end-December 2012. For example, Sony and Toyota have seen huge gains since the start of the year. Waves of foreign cash, which now account for two-thirds of daily trading, have flooded into the market.
How have Abenomics and the 2020 Olympic Games boosted the Tokyo Stock Exchange?
The first two arrows of Abenomics, monetary and fiscal stimulus, contributed to stronger economic growth in the first half of the year and a general sense of optimism. Moreover, the depreciation of the Japanese yen has lifted the profits (denominated in yen) of Japan's export dynamos, and hence their share prices.
The organization of the 2020 Olympic Games is expected to require substantial infrastructure expenditure, and boost tourism and related activities. This prospect has doped up the prices of relevant companies, even though most estimates suggest a minor positive impact from the Olympic Games.
The return of confidence has also contributed to the growth of initial public offerings (IPOs) by companies which are making their first sale of stock to the public ("going public"). For a private company to become a public company, it must be listed on the stock exchange and becomes subject to strict rules and regulations, especially regarding information disclosure. Some 60 IPOs are expected this year, up from 48 last year, but still way down on the 204 of year 2000.
Does the positive trend suggest a revival of the Japanese economy? And will it last?
Despite the positive news coming out of the stock market, we must not get too carried away. Japanese companies listed on the stock exchange represent less than 1% of the almost 5 million Japanese companies. Small and medium enterprises account for 70% of total enterprise employment and over 40% of enterprise sales.
These smaller companies are experiencing a much less healthy situation than Japan's large enterprises. The majority of smaller companies do not directly service export markets, and thus have not benefited from the depreciation of the yen. Even those supplying inputs to larger companies would not have seen their prices rise, as exporters are pocketing most of the benefit of the depreciation.
Further, the depreciation of the yen has increased the domestic cost of imported energy and raw materials. And as workers have received little by way of wage increases or higher bonuses, there has been little impact on domestic demand.
The initial wave of optimism of Abenomics now seems to be fading, with the latest growth data revealing a return of economic weakness. The structural reforms promised as Abenomics third arrow are very slow in coming, and there is a risk that they will never come at all. Japan's notorious vested interests are always there to save their skin and block progress.
The costs of the Olympic Games will add further to Japan's horrendous public debt, which already represents over 200% of GDP. Indeed, history shows that there is very much an "Olympic Games curse", with the cost of hosting the Games (or similar events) usually exceeding the benefits. In theory, the Olympics are an opportunity for cities to invest in their infrastructure, clean up dilapidated areas and promote tourism. But all too often, they result in white elephants, cost overruns and debt burdens.
So how long will the "stock-market party" last?
Just one month ago, Nikko Asset Management's Chief Investment Officer for Japan, Hiroki Tsujimura, reportedly predicted a 50% rise in Tokyo's stock market next year.
Future stock prices will also depend crucially on the wisdom and mood of the proverbial "Mrs Watanabes", the many househoid investors who manage Japan's large store of domestic personal savings.
Some 54% of household financial assets, or $8.6 trillion, is parked in cash or cash equivalents, compared to just 8 per cent directly invested in equities. These Mrs Watanabes certainly have the power to move markets.
But we will have to wait and see what they do. All too often, they are much wiser than we think.
The Tokyo Stock Price Index, TOPIX, is estimated from the 1700 companies listed on the Tokyo Stock Exchange First Section.
A new index, the "JPX-Nikkei Index 400", will be calculated from January 6, 2014, and put a major focus on return on equity and corporate performance. It comprises 400 companies which meet global investment standards and thus have high appeal to investors.
Berman reports:
"Japan's benchmark Nikkei 225 hit a fresh six-year high on Thursday, pushing its year-to-date gains to more than 51 per cent and attracting more interest in the country as a turnaround story with big momentum.
Indeed, some observers believe the fun is only just getting started for Japanese stocks. The question lingers, though: Is this latest bout of optimism different from any of the others over the past two decades?"
Only time will tell.
WSJ's Kosaku Narioka and Shani Raja report:
"December 25's close brought the Nikkei's year-to-date gain to 54%, the best among the world's major economies. By comparison, the Dow Jones Industrial Average is up 25% this year, while Hong Kong's Hang Seng Index advanced 2.3%.
Japan's market has been buoyed by confidence in Prime Minister Shinzo Abe's plan to end nearly two decades of deflation. Many expect Mr. Abe's economic-growth strategy to bolster corporate profits and lead to further gains in share prices in 2014.
Foreign flows into Japan's stock market have surged this year. For the 11 months through November, foreign investors purchased a net ¥14.8 trillion ($142 billion) of Japan stocks, compared with inflows of ¥830 billion during the same period in 2012."
Before delving into this question, it is worth highlighting that Tokyo still has one of the world's most important stock exchanges. With its 3400 listed companies (including 30 foreign companies), Tokyo has the world's third largest stock exchange by listings, coming in after Mumbai and Toronto. In terms of market capitalization, it has also the world's third largest. And based on market turnover, it has world's fourth largest.
Indeed, the Tokyo Stock Exchange can trace its roots back to 1878. Despite the global and regional preoccupation with China, that country's leading stock exchange of Shanghai still ranks behind Tokyo. The Tokyo Stock Exchange supports trading in bonds and derivatives (like stock index futures and and equity options), as well as equity stocks.
The Tokyo Stock Exchange enjoyed its heyday in Japan's bubble economy in the 1980s, with the Nikkei index reaching almost 40,000 points. It then crashed in the early 1990s, and has since fluctuated between 10,000 and 20,000. See note below on Tokyo stock market indexes.
With the return to power of Prime Minister Shinzo Abe one year ago, and the advent of Abenomics, the Tokyo Stock Exchange has taken off again. On 21 November 2013 it stood at 15,366, up from 10,395 at end-December 2012. For example, Sony and Toyota have seen huge gains since the start of the year. Waves of foreign cash, which now account for two-thirds of daily trading, have flooded into the market.
How have Abenomics and the 2020 Olympic Games boosted the Tokyo Stock Exchange?
The first two arrows of Abenomics, monetary and fiscal stimulus, contributed to stronger economic growth in the first half of the year and a general sense of optimism. Moreover, the depreciation of the Japanese yen has lifted the profits (denominated in yen) of Japan's export dynamos, and hence their share prices.
The organization of the 2020 Olympic Games is expected to require substantial infrastructure expenditure, and boost tourism and related activities. This prospect has doped up the prices of relevant companies, even though most estimates suggest a minor positive impact from the Olympic Games.
The return of confidence has also contributed to the growth of initial public offerings (IPOs) by companies which are making their first sale of stock to the public ("going public"). For a private company to become a public company, it must be listed on the stock exchange and becomes subject to strict rules and regulations, especially regarding information disclosure. Some 60 IPOs are expected this year, up from 48 last year, but still way down on the 204 of year 2000.
Does the positive trend suggest a revival of the Japanese economy? And will it last?
Despite the positive news coming out of the stock market, we must not get too carried away. Japanese companies listed on the stock exchange represent less than 1% of the almost 5 million Japanese companies. Small and medium enterprises account for 70% of total enterprise employment and over 40% of enterprise sales.
These smaller companies are experiencing a much less healthy situation than Japan's large enterprises. The majority of smaller companies do not directly service export markets, and thus have not benefited from the depreciation of the yen. Even those supplying inputs to larger companies would not have seen their prices rise, as exporters are pocketing most of the benefit of the depreciation.
Further, the depreciation of the yen has increased the domestic cost of imported energy and raw materials. And as workers have received little by way of wage increases or higher bonuses, there has been little impact on domestic demand.
The initial wave of optimism of Abenomics now seems to be fading, with the latest growth data revealing a return of economic weakness. The structural reforms promised as Abenomics third arrow are very slow in coming, and there is a risk that they will never come at all. Japan's notorious vested interests are always there to save their skin and block progress.
The costs of the Olympic Games will add further to Japan's horrendous public debt, which already represents over 200% of GDP. Indeed, history shows that there is very much an "Olympic Games curse", with the cost of hosting the Games (or similar events) usually exceeding the benefits. In theory, the Olympics are an opportunity for cities to invest in their infrastructure, clean up dilapidated areas and promote tourism. But all too often, they result in white elephants, cost overruns and debt burdens.
So how long will the "stock-market party" last?
Just one month ago, Nikko Asset Management's Chief Investment Officer for Japan, Hiroki Tsujimura, reportedly predicted a 50% rise in Tokyo's stock market next year.
Future stock prices will also depend crucially on the wisdom and mood of the proverbial "Mrs Watanabes", the many househoid investors who manage Japan's large store of domestic personal savings.
Some 54% of household financial assets, or $8.6 trillion, is parked in cash or cash equivalents, compared to just 8 per cent directly invested in equities. These Mrs Watanabes certainly have the power to move markets.
But we will have to wait and see what they do. All too often, they are much wiser than we think.
Tokyo stock market indexes
The Nikkei 225 is the most commonly cited index for Tokyo's stock market. It is based on a selection of 225 domestic common stocks -- it is the equivalent of the S&P 500.The Tokyo Stock Price Index, TOPIX, is estimated from the 1700 companies listed on the Tokyo Stock Exchange First Section.
A new index, the "JPX-Nikkei Index 400", will be calculated from January 6, 2014, and put a major focus on return on equity and corporate performance. It comprises 400 companies which meet global investment standards and thus have high appeal to investors.
Article update: Tokyo's bull market could have much further to run
Tokyo's bull market could have much further to run, argues David Berman of Canada's The Global and Mail on Friday 29 November 2013.Berman reports:
"Japan's benchmark Nikkei 225 hit a fresh six-year high on Thursday, pushing its year-to-date gains to more than 51 per cent and attracting more interest in the country as a turnaround story with big momentum.
Indeed, some observers believe the fun is only just getting started for Japanese stocks. The question lingers, though: Is this latest bout of optimism different from any of the others over the past two decades?"
Only time will tell.
Another update: Sights are raised for Japan's rally
Japanese shares could have another stellar year in 2014, though not without volatility, reports the Wall Street Journal on December 26.WSJ's Kosaku Narioka and Shani Raja report:
"December 25's close brought the Nikkei's year-to-date gain to 54%, the best among the world's major economies. By comparison, the Dow Jones Industrial Average is up 25% this year, while Hong Kong's Hang Seng Index advanced 2.3%.
Japan's market has been buoyed by confidence in Prime Minister Shinzo Abe's plan to end nearly two decades of deflation. Many expect Mr. Abe's economic-growth strategy to bolster corporate profits and lead to further gains in share prices in 2014.
Foreign flows into Japan's stock market have surged this year. For the 11 months through November, foreign investors purchased a net ¥14.8 trillion ($142 billion) of Japan stocks, compared with inflows of ¥830 billion during the same period in 2012."
REFERENCES:
- Tokyo Stock Exchange- Yen and Yang: the response of the Nikkei to the Yen by Andrew Howland and Benjamin Mandel. Global Economic Intersection, November 18, 2013.
- Japan's stock market tipped to boom by Melanie Timbrell. MyWealth News, 15 October 2013.
- Tokyo's bull market could have much further to run. The Globe and Mail, Friday, November 29, 2013
- Sights are raised for Japan's rally. Wall Street Journal, December 26, 2013