Date published: 18 February 2020
When Japan’s stock market opened on Monday this week, it had much in common with a fugu puffer fish: expensive, delicious only to fanatics and absolutely riddled with danger.
Over the weekend, round-the-clock media coverage focused on the spread of coronavirus, which had caused factory stoppages and other phenomena sure to cause financial trouble. By the time trading began, a domestic credit rating agency released a list of 250 Japanese companies — from piano manufacturers to bullet train operators — that it said would be particularly hard hit.
The government then piled on the misery, revealing that fourth-quarter national growth shrank at an annualised rate of 6.3 per cent, much worse than an expected 3.7 per cent decline. The drop, triggered by an October increase in consumption tax, takes Japan to the brink of recession.
Then came a report on sales in the country’s department stores in the first half of February, revealing the grim effects of high-spending Chinese visitors staying at home. Analysts declared the situation almost as bad the post-Lehman Brothers wipeout.
At almost any time in the past 30 years, any one of these might have been enough to wreck the Tokyo market, sending the Topix into those big spasms of capitulation that once seemed part of the natural order. But the pain this time, despite everything, has been comparatively dulled: the toxic blowfish, despite its reputation for lethality, has been subdued. The benchmark index remains comfortably in the middle of its trading range of the past couple of years and a good 13 per cent higher than it was at the start of 2019.
Some confess (quietly) to being puzzled. Plenty of veteran Tokyo investors and traders feel that something worse should be playing out by now, but are grateful it has not. They have their own theories about what may be happening. The cheap yen is one popular explanation, its value pulled down by the relentless outflow of investment money from corporate Japan and the country’s pension funds. But the more persuasive answer seems to rest in two forces that have gained momentum in recent years.
The first of these, visible this week, has been the huge presence of the Bank of Japan and its ¥6tn-a-year ($55bn) programme of buying exchange traded funds — a mechanism that allows it to come into the market on any given day to buy about ¥70bn. The BoJ has deployed that weapon on four of the 11 trading sessions so far in February — roughly the same pace as January and not especially elevated from the pace that became the norm between 2016 and early 2019. Over the years, a pattern has now emerged: if the Topix falls by 0.5 per cent or more in the morning session, the BoJ will be there to buy a big chunk of Topix-tracking ETFs in the afternoon.
One conclusion is that this price-insensitive buying generates artificial upside — a psychological trick that the BoJ had hoped would tempt people to become investors in the domestic stock market.
A better interpretation, say traders, is that over time the BoJ has merely added friction to the downside. The predictability of the BoJ’s buying on dips has made short positions more dangerous trades. That means that even now, despite terrible newsflow, hedge funds have tended to opt out from the large bearish bets that would have amplified sell-offs in the past.
A second source of hidden support for the market has come from company share buybacks that, at almost ¥14tn last year, were more than 100 per cent higher than in 2018. The purchases are, undoubtedly, a manifestation of a shareholder-friendly shift in recent years, as companies disgorge some of their huge cash balances. But it may be overstating things — as one Nomura strategist suggests — to attribute the market’s resilience to a stand-off between “coronavirus and corporate governance”. If the market were genuinely thrilled by progress on governance, value stocks would not still be mouldering on the shelf after a decade of underperformance.
The critical element here, according to traders, is not the scale of the buybacks but the exceptionally low-volume trading environment into which they have been pitched.
Kirin is a good example: since announcing a huge buyback in November last year and the end of January, the drinks group has bought just over 16m of its shares. But because Tokyo volumes are generally low, its own purchases have represented an average of about 14 per cent of daily trading over that period. Extrapolated across a market where buybacks are in high fashion and show no signs of abating, their influence is probably far greater than it might be elsewhere.
“I have to believe that these buybacks are offering a greater invisible support to the market than any of us imagine,” said one Tokyo-based broker.
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