A snow-capped Mount Fuji,c enter, is pictured behind a construction site in Tokyo on Feb. 16, 2015. (AFP Photo/Yoshikazu Tsuno)

Abenomics Divides Japan’s Stocks as Small Shares Left Behind


FEBRUARY 23, 2015

Japanese Prime Minister Shinzo Abe’s plan to revive the nation’s economy is leaving small companies behind.

The broadest measure of equities has soared 18 percent since Oct. 31, when the Bank of Japan pledged to triple its share purchases and the $1.1 trillion public pension fund doubled its allocation to local stocks. Left in the Topix index’s wake: a gauge of startup technology and other small companies, which added 0.8 percent.

While Abe is counting on monetary easing, fiscal stimulus and reforms to put the economy on a solid footing, the measures are so far exacerbating a divide between Japan’s big exporters and the smaller firms getting no support from a weaker yen or state-financed share purchases. With the success of the premier’s plan resting on large businesses sharing the spoils with the rest of the economy, Mizuho Asset Management says the stock market’s signaling transmission breakdown.

“The gap is just getting wider, and small caps are really struggling,” said Seiichiro Iwamoto, who oversees funds focusing on small and medium-sized stocks as a money manager at Mizuho Asset. “Abe’s thinking is to try make things better for the large caps first, and that’ll trickle down, but we haven’t seen it.”

Correlation breakdown

The Tokyo Stock Exchange Mothers Index has trailed the Topix in five of the past six months and is on course to do the same in February. The relationship between price moves on the indexes is the weakest in a year, based on 120-day correlation data compiled by Bloomberg. The Topix gained 0.7 percent to 1,510.76 as of 9:40 a.m. Tokyo time on Monday. The Mothers index added 0.5 percent to 879.82.

Customers of Matsui Securities, one of the nation’s five biggest online brokerages, are selling small-cap shares and buying everything from Sony to the largest banks.

“The government pension fund and BOJ have become the market’s main supports,” said Tomoichiro Kubota, a senior analyst at Matsui Securities. “That’s the big reason. Individuals are deserting small-cap stocks.”

BOJ governor Haruhiko Kuroda pledged on Oct. 31 to boost purchases of exchange-traded Japanese stock funds to about 3 trillion yen ($25.2 billion) a year from 1 trillion yen. The same day, the Government Pension Investment Fund, or GPIF, said it would more than double its target for domestic equities to 25 percent of assets.

Shrinking turnover

Almost none of that money is going to smaller shares. The BOJ buys exchange-traded funds linked to the Topix, the Nikkei 225 Stock Average and the JPX-Nikkei Index 400, all of which are filled with the nation’s biggest companies. About 86 percent of GPIF’s Japan stock holdings were passive investments following the Topix as of March, the most recent data that’s available.

Average daily turnover on the Topix since Oct. 31 has risen 7 percent from the same period a year earlier, according to data compiled by Bloomberg. That compares with a 23 percent decline for the Mothers gauge and 15 percent on the Jasdaq index, another measure of small shares.

“Our market now is an artificial one where the BOJ and GPIF buy,” said Masamitsu Ohki, chief portfolio manager at Fivestar Asset Management, which oversees about 2 billion yen. “I have to hold small-cap stocks and that’s pulling down performance. Investing at the moment is difficult.”

The world’s third-largest economy crawled out of recession in the final three months of 2014, posting annualized growth of 2.2 percent that fell short of analyst estimates.

Abe’s success

Abe has succeeded in ending more than a decade of deflation, with the central bank’s preferred measure of prices increasing each month from June 2013 through December 2014. What hasn’t yet happened: wage growth. Pay packets adjusted for price changes have been falling since mid-2013, curbing the consumer spending that Abe needs to bed down his recovery.

Earnings per share on a trailing 12-month basis for companies in the Mothers index was 5.84 yen as of Feb. 19, a 75 percent drop from the end of 2012 when Abe was beginning his second term. For the Topix, it was 88 yen, 85 percent higher over the period. Companies on the Nikkei 225 are forecast to post record profits this year, spurring the index to the highest close last week since May 2000.

Bankruptcies linked to the yen’s 28 percent slide under Abe rose to a record in November, highlighting strains on small and medium-sized companies due to rising import costs, according to Teikoku Databank. Japan may see a continued increase in such corporate failures, the research company said in December.

Sharing spoils

Abe is relying on the bigger companies to share their wealth. In December, the premier called on those whose earnings have benefited from the weaker yen to boost wages and investments and review the prices they pay suppliers.

Toyota Motor, Japan’s largest company, forecasts profit to rise 17 percent to a record 2.1 trillion yen in the year ending March. The carmaker said this month it may ease up on its usual practice of squeezing suppliers to lower prices of auto parts.

The BOJ and GPIF’s preference for large-cap stocks has nothing to do with small-cap underperformance, according to Jonathan Allum, a strategist at SMBC Nikko Capital Markets in London. If true, smaller shares would have trailed the Topix since Kuroda stepped up ETF purchases two years ago, he said.

The Mothers index is skewed by a few big stocks that dominate weightings, and investors are paring holdings of shares that rallied in 2013, Allum said.

Not ‘discouraging’

“You could argue that the underperformance of the Mothers index, given its peculiar make-up, isn’t that surprising given how strong some of those names have been,” Allum said in a phone interview. On spreading the spoils, the evidence “isn’t completely discouraging,” he said. “Wealth effects are creeping through.”

The Mothers index surged 137 percent in 2013, its best year on record, compared with a 51 percent gain for the Topix. Mixi Inc., a social-networking site operator that has a 12 percent weighting on the smaller gauge, almost quadrupled that year. It’s down 24 percent since the end of October.

As long as the large-cap stocks have central bank support, smaller companies will inevitably suffer, said Makoto Kikuchi, the chief executive officer of Myojo Asset Management.

“While GPIF and the BOJ are buying, it’s unlikely the disparity in performance will reverse,” he said. “It’s hard to paint a picture where small stocks catch up.”