Japan Stocks Sink to Monthly Worst in Developed Markets

Japan's stocks trailed every other developed market last month, with the steepest rally in 40 years petering out on concern a higher sales tax will curb growth while U.S. stimulus bolsters the yen.

The Topix index rose less than 0.1 percent in October, the smallest gain among 24 developed markets tracked by Bloomberg. The gauge, which remains the best performer this year with a 39 percent surge, has fallen for four of the past six months. Prime Minister Shinzo Abe said on Oct. 1 he will proceed with a plan to raise the sales levy in April to 8 percent from 5 percent. Strategists pared forecasts for yen declines as a weaker economic outlook spurred speculation that the Federal Reserve will delay reducing its monthly bond purchases.

"The biggest drag is that the Fed's tapering has been put off, eroding a bearish view on the yen," said Kenichi Kubo, a senior fund manager at Tokio Marine Asset Management Co., which oversees about 5 trillion yen ($51 billion). "There's also a sense that an increase in the sales tax will weigh on growth. And it seems we won't get much out of Abe's third arrow."

Investors are waiting to see whether Abe can succeed with growth-oriented initiatives to make Japan's economic recovery sustainable, in the so-called third arrow of his strategy following fiscal stimulus and monetary easing. Exporters led by Toyota Motor Corp. are reliant on a weaker yen to help them meet the outsized profit gains expected by analysts. Topix (TPX) member companies will boost earnings by 26 percent in the next 12 months, compared with the 11 percent growth estimated for the Standard & Poor's 500 Index, data compiled by Bloomberg show.

Third Arrow

Abe may have to put off plans for key deregulation of the labor market in special economic zones, including lifting restrictions on working hours for white-collar workers, the Nikkei newspaper reported on Oct. 18.

The yen gained 5.2 percent against the greenback through yesterday from a 4 1/2-year low reached May 22. The currency will trade at 100 per dollar by year-end, from 98.36 yesterday, according to the median of analyst forecasts compiled by Bloomberg. At the end of September, strategists were predicting a slump to 102 by Dec. 31.

The Topix dropped 1 percent as of 2:16 p.m. in Tokyo as the yen climbed 0.4 percent to 97.95 per dollar.

The Fed will wait until March to taper its monthly bond buying, a Bloomberg survey Oct. 17-18 showed.

Other Asian benchmark indexes trailed developed-market peers in October. Singapore's Straits Times Index rose 1.4 percent last month, the second-worst performer among the 24 markets. Hong Kong's Hang Seng Index added 1.5 percent last month, the third-worst performer. The index slumped 1.4 percent on Oct. 23 as China's money-market rates jumped.

Greece's ASE Index led gains with a 17 percent surge, followed by Italy's FTSE MIB Index, which climbed 11 percent.

Stimulus Package

The Topix capped four consecutive quarterly gains through September, climbing 62 percent for the biggest rally since 1973.

The advance should resume toward the end of the year as Abe announces details of a 5 trillion yen spending plan to cushion the first sales-tax increase since 1997 while corporate earnings continue to improve, said Masaaki Yamaguchi, equity market strategist at Nomura Holdings Inc.

"The stimulus package will offset a drop in spending following the sales tax increase," Yamaguchi said. "As the government announces details about the package, investors will buy its beneficiaries."

Nomura expects the Topix to climb to 1,500 by the end of December, the highest forecast among 18 estimates in a Bloomberg survey last month.

Company Earnings

Yesterday was the peak of the earnings season with some 270 companies on the Topix reporting. Of the 147 companies on the Topix that have posted quarterly results since Oct. 1 and for which estimates were available, 83 exceeded expectations, according to data compiled by Bloomberg.

Canon Inc., the world's largest camera maker, cut its annual profit forecast and predicted its first drop in sales of models with an interchangeable lens as consumers switch to smartphones to take photos. Net income will probably total 240 billion yen for the year ending December, the Tokyo-based company said Oct. 24, down from its earlier forecast of 260 billion yen.

Nippon Steel & Sumitomo Metal Corp., the world's largest steelmaker by market value, forecast full-year profit that lagged analyst estimates. Net income may be 200 billion yen in the 12 months ending March 31, the Tokyo-based company said Oct. 30. That's below the average estimate of 232 billion yen from 18 analysts compiled by Bloomberg.

Relative Value

The Topix traded at 1.24 times book value yesterday, compared with 2.55 for the S&P 500. The U.S. benchmark measure capped a 4.5 percent advance last month, its second monthly gain, and closed at a record high on Oct. 29.

Keeping U.S. stimulus for longer would have mixed outcomes for Japanese equities by boosting demand for riskier assets while also causing the dollar to fall against the yen, damping the earnings outlook for exporters.

The Fed on Oct. 30 maintained the pace of its bond purchases and said it's seeking more evidence that the economy will continue to improve. The Topix dropped 0.9 percent yesterday as the yen advanced after the Bank of Japan maintained unprecedented monetary easing.

Many companies won't raise their forecasts substantially unless they see another slump in the Japanese currency, said Hitoshi Asaoka, a Tokyo-based senior strategist at Mizuho Trust & Banking Co.

"Earnings are recovering at a very slow pace," Asaoka said. "I think the currency is the biggest reason Japanese stocks are lagging U.S. counterparts."