Japan Stocks Poised to Rebound After Trailing Developed Markets

Dec. 24 (Bloomberg) -- Government spending and the central bank’s plan to hold down interest rates will spur a rebound in Japanese stocks, this year’s worst-performing equities among major markets, six of the biggest securities firms said.

Kathy Matsui, Goldman Sachs Group Inc.’s chief strategist in Tokyo, forecasts the Topix index will rally 16 percent from the close on Dec. 22 to 1,050 by the first half of next year as the government moves to prevent a double-dip recession. Nomura Holding Inc.’s chief strategist, Seiichiro Iwasawa, predicts the Topix will climb to as much as 1,200 by the end of 2010.

“Chances are high for a turnaround in currency and equity markets,” Iwasawa said in a Bloomberg interview this month. “We can expect improvement in the performance of Japanese shares relative to other markets.”

Forecasts for a recovery in Japanese shares come as the Topix is poised for the smallest annual gain among the so-called Group of 20 nations, rising 5.1 percent this year, data compiled by Bloomberg show. The gauge is trailing the MSCI World Index by 21 percentage points, the most for any year since 1998, the data show.

Prime Minister Yukio Hatoyama’s government announced a 7.2 trillion yen ($80 billion) economic stimulus package on Dec. 8. The Bank of Japan unveiled a plan the previous week to provide 10 trillion yen in emergency credit to banks in an effort to revive an economy that it estimates will contract this year.

Bank of Japan Governor Masaaki Shirakawa said on Dec. 21 that the bank is committed to holding interest rates near zero “persistently.” The next day, the yen fell and the Nikkei 225 Stock Average climbed to its highest close in three months.

Strong Yen

The Topix dropped for three-straight months through November, widening its underperformance compared with benchmark indexes in other countries. The Russian Trading System Index, the Group of 20’s top performer, has climbed 124 percent this year. The earnings outlook in Japan has been hurt by a strong yen, whose average of 93.63 to the dollar this year is the highest level since currencies became freely traded in 1971.

A strong yen hurts exporters by reducing their foreign revenue when converted into yen and making their products more expensive overseas.

“Pessimism and frustration about Japanese shares are at their highest level in my 20-year career,” said Goldman Sachs’ Matsui in a report dated Dec. 10. “The government has finally realized that unless it quickly acts, the economy will be in danger of contracting again.”

Earnings Outlook

So-called current profit, or pretax profit from operations, for Japan’s major corporations will rise 62 percent in fiscal 2010 from the previous year, according to a forecast by Nomura Securities Financial & Economic Research Center, which assumed an exchange rate of 90 yen to the dollar.

Overall earnings for companies in the Topix are projected to rise 85 percent to 44.12 yen a share next year, according to estimates from equity analysts compiled by Bloomberg. That compares with an estimated growth of 27 percent for stocks in the MSCI World Index and 39 percent for the MSCI Asia Pacific index.

More stimulus measures may be introduced, along with dollar buying by the Bank of Japan, to stem the yen’s appreciation, according to Nomura’s Iwasawa.

The government’s implementation of fiscal and monetary policies to counter deflation and a stronger yen “make it easier to envision V-shaped recoveries in corporate earnings in fiscal 2010,” said Credit Suisse Group AG’s chief market strategist for Japan, Shinichi Ichikawa.

U.S. Jobs

The Bank of Japan forecasts the nation’s real gross domestic product will expand 1 percent in 2010 after falling 3.4 percent this year and dropping 1.13 percent in 2008.

“Corporations may continue to raise their earnings forecasts into early spring as the global economy improves,” said Shoji Hirakawa, UBS AG’s chief equity strategist for Japan. “Companies that are especially sensitive to changes in the economy may lead gains in equity markets.”

Further gains in Japan’s equity markets will depend on U.S. employment rates, according to Mizuho Securities Co. Equity Strategist Tomochika Kitaoka.

“When better job statistics make it possible for the U.S. to raise interest rates from near-zero, the yen may be sold and Japanese shares may be bought,” Kitaoka said in a report dated Dec. 11.

U.S. unemployment is estimated to rise to 10 percent in 2010 from 9.3 percent this year, according economists’ estimates compiled by Bloomberg, while real GDP is projected to expand 2.6 percent from a contraction of 2.5 percent this year.

Domestic Demand

A U.S. economic recovery may leave Japan as the last major economy with near-zero interest rates, which would “prompt liquidity to head to Japan,” said Kitaoka.

“Shares of Japanese exporters may be bought if improved U.S. employment prompts expectations of a recovery in consumer spending,” said Barclays Plc’s chief equity strategist for Japan Fumiyuki Takahashi in an interview earlier this month.

Companies that depend on domestic demand may also climb after the expansion of child-care subsidies planned by the Hatoyama administration, according to UBS’s Hirakawa. From April, the start of the fiscal year, ”the stimulus may lead to a greater-than-expected recovery in domestic demand. I’m focusing on banking, real estate, and retail shares,” said Hirakawa in an interview this month.